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85 IRET Congressional Advisory 1 (1999)

handle is hein.taxfoundation/iretcgadv0082 and id is 1 raw text is: July 22, 1999 No. 85 MOSTLY GOOD STUFF IN THE HOUSE AND SENATE TAX BILLS How to Judge a Tax Bill The House and Senate tax bills are good proposals that could become much better proposals with modest changes. The tax plans should be judged by whether or not they move us closer to the goals of fundamental tax reform - a simple, neutral, unbiased, pro-growth tax system. How do the House and Senate tax bills stack up against that objective? The House a are good pr A reformed tax system become muec would have these attributes: with modest c A single low tax rate applied neutrally to all income, properly measured, with no tax-induced economic distortions. Neutral treatment of income used for immediate consumption and income used for saving and investment. It would either defer tax on saving until it is withdrawn for consumption, or not tax returns on after-tax saving, i.e., all saving would get pension or IRA treatment (regular or Roth). Investment outlays would be expensed, not depreciated. No double taxation of corporate income. No death tax. No excise and nuisance taxes. No payroll tax. Social Security contributions and benefits would be replaced by personal retirement posa 'i bei hiange saving plans owned by individuals, and bolstered by a federal safety net as needed. Elements of the House and Senate Tax Bills Rate cuts (both bills). The 10% across the board tax rate cut in the House bill would lower marginal tax rates in all brackets, and enhance after- tax work and saving incentives at the margin for all taxpayers. The Senate plan only reduces the 15% bracket (to 14%), and is not at the margin for many taxpayers. The House rate cuts would do more to boost the economy. Lower rates are good, but the rate structure and the tax base (what we tax) matter too. Neither rate cut proposal flattens the tax rate structure nor makes the tax code less biased. Graduated tax rates punish people the more they produce, and the rising disincentive chokes off effort. The most damage is done by the highest rates, which should be cut the most. nate tax bills Marginal tax burdens on Is that could saving and investment come tel roposals from the combined tax rates S. that result from the repeated taxation of income that is saved and invested, not just the rates imposed at any one level. The biggest cut in disincentives and the greatest gain in GDP would come from eliminating the double or triple taxation of capital, not from lowering the basic tax rates. A bottom rate cut could interfere with tax reform. A flat rate tax would probably need a tax rate somewhere between 17 and 23 percent of income used for consumption in order to pay for a reasonable level of government. Lowering the bottom tax rate to 14% or 13.5% would make it difficult to enact a single-rate tax in the future. These considerations suggest an alternative reform. Instead of cutting the bottom income tax Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N.W., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www. ret.org

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