Policy Watch

Author: Washington Post

Published: September 1, 2002

Treasury Secretary Paul H. O'Neill came into Washington promising a sweeping reform and simplification of the tax code. But the tax-cut ideas now being tossed around by the administration would almost surely move tax policy in the opposite direction.

As a result of its economic forum in Waco, Tex., the Bush administration has promised to come up with tax cuts designed to boost the economy and restore enthusiasm for the stock market. Current ideas include increasing the amount of stock market losses that investors can deduct from ordinary income, reducing capital-gains tax rates, raising contribution limits for IRAs and 401(k) accounts, and limiting the double taxation of corporate dividends.

Economists William G. Gale and Peter R. Orszag lay out a succinct, tendentious case against these ideas in a brief paper that can be found on the Brookings Institution Web site (www.brookings.org). Their argument is that the cuts would be regressive and ineffective while setting a "dangerous precedent" for government intervention in the stock market. And if that's not enough, they would also add to an already growing budget deficit.

More broadly, their paper adds to the argument that these are precisely the kind of ideas that have already turned the tax code into a morass that distorts economic behavior and encourages everyone to game the system.

Economists and tax reformers have long argued, for example, that all income should be taxed at the same rate -- having different ones merely creates cottage industries dedicated to converting one type of income into another. By that standard, the idea of lowering capital gains tax rates makes the code worse, not better.

Expert consensus also favors taxing consumption rather than income. Such a system would allow people to maintain one tax-free account for all their savings and investments, with taxes paid only when money is removed from the account. Tinkering with IRA limits only raises the larger question.