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180 IRET Congressional Advisory 1 (2004)

handle is hein.taxfoundation/iretcgadv0177 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION
IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing
the public about policies thait will promote growth and efficient operation of the market economy.

October 28, 2004

Advisory No. 180

A PRINCIPLED ANALYSIS OF PRESIDENT BUSH'S
TAX PROPOSALS

Introduction and Summary
President Bush  has proposed   a tax  and
economic program of four main parts: permanent
extension of the most recent tax cuts, enhancement
of tax-friendly saving arrangements, enactment of
fundamental tax reform, and fundamental reform of
Social Security to permit personal accounts with real
saving. The plan has two main objectives, the
promotion of certain social goals and the promotion
of long term growth.
Some of the features of the original Bush tax
reductions and their proposed extension address
social issues, or were designed to spread the
wealth of the tax cuts to people with limited tax
liabilities, or to assist the unemployed.  These
provisions include making permanent the larger
child credit, the marriage penalty relief, and the 10
percent tax bracket.  These provisions are not
focused primarily on expanding incentives to
increase economic activity or jobs, although some
married couples will find themselves in a lower tax
bracket as a result of the policy change. Any
pump-priming which old-style analysis might
attribute to these provisions is a mirage.
The major growth elements of the tax cut
extension plan include making permanent the
recently enacted cuts in marginal tax rates, the 15
percent tax rate caps on capital gains and dividends,
and the repeal of the estate tax beyond 2010. These
provisions have helped to produce the healthy 4% to
5% growth rates the economy has turned out over
the last several quarters.

Allowing these provisions to expire in 2010
would result in a significant tax increase and a
significant reduction in incentives to work, save, and
invest, and would slow economic growth. Making
them permanent would reinforce the pro-growth
impact they have had in recent quarters. They
would be generally consistent with fundamental tax
reform, which means reducing the biases against
saving and investment found in the current broad-
based income tax system.
The Bush saving proposals move in the
direction of eliminating the biases in the income tax
against saving. They expand Roth IRA treatment
of saving and broaden pension availability. The
dividend and capital gains relief proposal reduces
the double taxation of corporate income.  The
corporate income tax still needs to be phased out or
fully integrated with personal taxes.
The President proposes to move forward on
fundamental tax reform and Social Security reform.
Tax reform   should  be understood  to  mean
eliminating tax biases against saving and investment,
and keeping tax rates low to encourage effort.
Social Security reform should mean the creation of
personal accounts that would involve real saving,
unlike the current tax-transfer system. If done
correctly, these  major reforms would   boost
employment, output and living standards by more
than ten percent, or between $4,000 and $5,000 a
year, for a middle income family.
All these proposals and reforms would be easier
to enact in the context of a net tax reduction. That

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