Tax Cuts Reloaded

George W. Bush is becoming the tax-cutting equivalent of Neo, blasting around the Beltway Matrix, leaving lower rates in his wake. Whether the federal budget is in “surplus” or deficit, President Bush has the moves to slice and dice. Not to push the metaphor too far, but this is certainly a new reality for all the Big Government Agent Smiths inside the Beltway Matrix.

The latest installment is the “Jobs and Growth Tax Relief Reconciliation Act,” which the president signed into law on May 28, 2003. The plan will bolster economic growth, encourage investment, and create new jobs. That’s great, but the cuts of 2001 and 2003 are clearly not enough. The tax code is still too complicated, and taxes and spending are still too high. We need fundamental reform.

Indeed, inside the Beltway Matrix, our action heroes must be on permanent offense in the fight for a tax code that is simple, low, fair, and honest. In this spirit, CSE has a list of the next targets for the tax-slaying machine.

Permanence for 2001 and 2003 Tax Cuts

There’s a glitch in the Matrix called “budget reconciliation.” The reconciliation process, while expedient, regrettably limits the life span of the two major Administration tax cuts. Congress should move quickly to convert these tax code changes into permanent law. Permanence in the tax code gives clearer guidance and certainty for businesses and individuals making long term investment and planning decisions. Making the laws permanent creates no negative budget impact in the near term, and generates substantial medium and long term economic gains as investors and businesses are given the certainty that today’s tax policy will last.

Elimination of the Double Taxation of Savings and Investment

Although the 2003 tax capital gains and dividend tax reductions will provide for economic growth and new jobs, CSE believes that the president’s original proposal to completely eliminate the double taxation of dividends would have had an even greater impact. Let’s take the final step and completely repeal the dividend tax. In addition, for the same reasons, the capital gains tax should also be completely eliminated. Both taxes stifle capital formation and economic growth and represent an unfair form of double taxation.

Further Income Tax Rate Reductions

This year’s tax cuts will accelerate the 2001 marginal income tax rate reductions, which will immediately put more dollars into consumers and investors’ hands. Lowering marginal income tax rates improves the incentives to work hard, save and invest. CSE applauds these cuts, and we’re ready for more. Americans should be able to keep more of the money they earn, and President Bush has said that the government shouldn’t take more than one-third of any taxpayer’s income. The Administration should push for further income tax rate cuts to make the president’s principle a Beltway Matrix reality.

Permanently End the Death Tax

Nothing seems to actually die inside the Beltway Matrix. That’s why the Administration should vigorously pursue permanent repeal of the Death Tax, and we’re cheered that the House is already revisiting this issue. The Death Tax is anti-family and anti-business, contrary to the entrepreneurial spirit, and is a leading cause of family and small business dissolution. The 2001 tax cuts prescribed slowly phasing out this onerous tax with complete repeal in 2011. In 2012, however, the Death Tax will reemerge to confiscate family inheritances at rates up to 60 percent. Moreover, the nation’s economy suffers as families dedicate tremendous financial resources to comply with this tax. These resources could be used to hire staff, reinvest in the company, or invest for the future if the Death Tax is permanently repealed.

Create and Expand Tax-Free Savings Accounts

Help us help ourselves. We need to do more to help families save for education and retirement without creating new government spending programs. The president’s proposed Lifetime Savings Accounts (LSAs) and the Retirement Savings Accounts (RSAs) would each allow contributions of $7,500 per year of after-tax income, and future earnings would not be subject to income taxes. This would spark a new wave of wealth creation by giving American workers ownership over their personal accounts. With the LSA, withdrawals could be made any time and for any purpose, while with the RSA, earnings would remain tax free only if withdrawn after the owner reaches age 58. Both vehicles would let families and workers help themselves to achieve the American Dream. Further, the President’s proposals will also simplify our tax code for employers and individuals.

Eliminate Taxation on American Corporate Foreign Earnings

Think globally, tax locally. Our tax laws place U.S.-based multinational companies at a disadvantage with their foreign competitors. The United States currently has a “worldwide” system of taxation, which means U.S.-based companies with global operations must pay taxes on income they earn overseas. Other countries use a “territorial” system, taxing only income within their borders. That’s why, too often, it is advantageous for American companies to “invert” and move their headquarters offshore—they’re unplugging from the Beltway Matrix.

This counterproductive tax is also one reason that the Senate passed a partial measure in the Jobs and Economic Growth bill this year to permit American companies to repatriate overseas assets at a low 5.35% tax rate. Unfortunately, this provision, sponsored by Senator Ensign, was only for a duration of one year, and it was dropped in Conference. Congress should revisit the issue, and respond to the broader problem by completely eliminating federal taxes on the income that American companies earn in their overseas operations.

In summary, no doubt the tax cuts in 2001 and 2003 are tremendous moves forward. And now it’s time for the next step. Adopting these additional measures will further improve the incentives to work, save, invest in new jobs, and grow the American economy. We’re moving ever closer to a pro-growth tax system that is simple, fair, low, and honest.

In the original movie, Morpheus declared that the oppressive “Matrix is everywhere.” The same can be said, unfortunately, of the modern tax code. But if we can pass these reforms over the next year, American workers will be another step closer to true economic freedom.