NCPA - National Center for Policy Analysis

The Bush Tax Strategy

September 18, 2002

President Bush started his effort to change tax policy with a plan for cutting marginal tax rates. He was criticized for not doing more, faster. The phase-in of the rate reductions enacted last year is indeed too slow for maximum economic impact. However, given political realities, it may have been impossible to do more under the circumstances.

Nevertheless, the rate reductions do move us in the right direction.

  • Economic theory is quite clear that high marginal tax rates are bad for economic growth because people make important decisions based on tax considerations.
  • The most obvious is the choice of whether to rent or buy a home -- and clearly, the deductibility of interest and the tax exemption for capital gains on a primary residence (up to $500,000 every 2 years for a couple) is a major motivation to buy, rather than rent.

But people make many other important decisions based on taxes -- for example, whether to buy taxable bonds or tax-free municipal bonds; buy stocks more likely to appreciate in value and be taxed at lower capital gains rates or those with high dividends that are taxed as ordinary income; and to develop careers as wage employees or as self-employed entrepreneurs.

There was another incremental move toward a new tax system: earlier this year businesses were given a 30 percent "bonus" on depreciation for new investments in machinery and equipment. The next step is to liberalize incentives for saving and investment.

Although the Bush Administration sometimes appears to be fumbling around with tax policy, there may be a strategy at work. At least it appears we are moving in the right direction.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, September 18, 2002

 

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