News Release

November 1, 2005

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Comments on Tax Reform by a Cato Scholar

Chris Edwards, director of tax policy studies at the Cato Institute, had these observations about today's Advisory Panel on Tax Reform:

The president's tax reform panel, headed by former senators Connie Mack and John Breaux, has issued its report. The report proposes to overhaul the federal tax code with either a "simplified income tax" (Plan A) or a "growth and investment tax" (Plan B). The report provides a detailed and thoughtful discussion about why federal tax reform is desperately needed

The panel's plans have many features that would promote growth. Plan A would eliminate the double taxation of dividends and cut the capital gains tax. Plan B would end the complex depreciation system and adopt more efficient capital "expensing," or immediate write-off of business investments.

However, the panel should have been more aggressive with cuts to top marginal tax rates. Plan A has four rates for individuals topping out at 33 percent. Plan B has three rates topping out at 30 percent. By contrast, Congress enacted a tax reform plan in 1986 that created a low and simple two-rate structure of 15 and 28 percent. Today, policymakers should proceed with fundamental reforms and move to a low-rate flat tax system for individuals.

Similarly, the panel's plans do not cut the 35 percent corporate tax rate enough. The rate is set at 31.5 percent under Plan A and 30 percent under Plan B. By contrast, the average corporate rate in Europe is just 27 percent, and Eastern Europe is enjoying a flat tax revolution with many nations having rates much lower than that. The Bush panel's corporate high tax rates don't cut muster in today's competitive global economy.

President Bush and Congress should move forward with the many pro-savings and pro-investment ideas in the panel's report, but they also need to be more aggressive about responding to global tax competition and cutting marginal tax rates further than proposed.