Vital Signs

The End of Income Taxes

The tax cuts proposed by President George W. Bush take significant steps toward the reform of a federal tax code that retards growth of the capital stock, productivity, and incomes of all Americans.  His plan to eliminate the death tax, increase expensing of investment for small businesses, end double taxation of dividend income, expand “returns exempt” taxation of IRA savings, and lower progressive rates on individual incomes are all welcome contributions toward a more efficient tax code.  Yet even if it is enacted, the President’s proposal will likely add more obstacles to comprehensive reform of the tax code because, once again, tax reform has been launched in a manner that defies economic and political priorities and realities.  

The ultimate priority of federal tax reform is to increase savings for investment.  To do so, however, by increasing the magnitude of our sizable federal deficit while failing to reduce spending would largely offset the net benefits of such a plan.  It is far more effective to change how we tax—that is, to replace lost revenues with better-designed taxation.  Tax neutrality is particularly important since the United States is engaged in a war with as-yet-unknown financial demands.  And the incipient burden of the baby boomers’ retirement requires greater national savings for investment, not increased federal indebtedness.

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