NCPA - National Center for Policy Analysis

Bush Lays the Foundation for Fundamental Tax Reform

February 5, 2003

Every few years, interest in fundamental tax reform rises. The leading proposal has long been a flat rate tax on consumed income, such as the Hall-Rabushka plan. However, the interest always fades because the transition from our current system is too difficult, both politically and economically.

Consequently, in recent years, flat tax supporters have concentrated more on incremental tax changes that would gradually move us in the direction of a flat tax. If enough progress were made, then perhaps at some future date we would achieve something close to it. Tax reformer Ernest Christian has identified the key steps as the 5 easy pieces:

  • Lower income tax rates, especially the top rate, to get us closer to a single statutory tax rate.
  • Increase depreciation allowances, so as to move closer to immediate write-offs for investments in capital equipment.
  • Raise the estate tax exemption and move toward repeal of this tax.
  • Relieve the double taxation of corporate profits and move toward full elimination of the corporate income tax.
  • Raise contribution limits for Individual Retirement Accounts, Keogh plans and 401(k) accounts in order to get as much saving as possible out of the tax base.

With last week's announcement that President Bush will propose expansion of deferred savings, we can see that he has proposed all 5 pieces, with 3 already enacted into law.

If Bush is successful in getting relief for double taxation and further elimination of saving from the tax base, he will have achieved meaningful legislative progress on every incremental change necessary to achieve fundamental tax reform.

Source: Bruce Bartlett, "Bush is Laying the Foundation for Fundamental Tax Reform," National Center for Policy Analysis, February 5, 2003.


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