Tax Reform Can Reduce The Burden Of Taxes
April 17, 2002
Due to the recession's toll on future budget surpluses, substantial additional tax cuts appear politically impossible for now, says Bruce Bartlett. However, tax reform is another way to cut the burden of taxes. Ronald Reagan showed how.
In his 1984 State of the Union Address, President Reagan called upon the Treasury Department to study the tax system and propose improvements. Treasury ultimately prepared a 3-volume study, which was distilled into a tax reform proposal passed by Congress -- the Tax Reform Act of 1986.
- It broadened the tax base by restricting tax deductions, exemptions, exclusions and credits, and used the revenue to lower tax rates.
- The top income tax rate fell from 50 percent to just 28 percent, and the corporate rate was reduced from 46 percent to 34 percent.
- Higher revenue from the broader base offset the revenue lost from lower rates, so that the package was revenue-neutral.
In the years since, tax rates have been sharply increased, and many new special provisions added to the Tax Code. Hence, there is now an opportunity simply to replay the Reagan strategy.
President Bush could recommend greatly expanding Individual Retirement Accounts, Keogh Accounts, 401(k) plans and other forms of tax-deferred retirement saving.
Eliminating corporate tax shelters and tax avoidance strategies that have developed since 1986 could pay for tax cuts for individuals. That is basically what Ronald Reagan did in 1986. Over 5 years, he raised taxes on corporations by $120 billion and cut taxes for individuals by a like amount.
Many provisions of the tax code could be simplified at little cost. Just allowing more taxpayers to do their own taxes again, instead of paying an accountant, would constitute a de facto tax cut for many.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, April 17, 2002.
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