Tax Cuts That Put People First
Bill Archer, the chairman of the House Ways & Means Committee, says he wants to simplify America's byzantine tax code. Yet his recent tax proposal does just the opposite. Because the new budget deal limits the amount of tax breaks he can distribute to special interests, the Texas Republican is offering up a convoluted series of phase-ins, phase-outs, triggers, and waiting periods that spread small amounts of dollars far and wide. Soon, Archer's plan will be joined by the Democrats' equally complex proposal. After weary negotiations, the compromise will be a complicated $85 billion tax cut that will barely influence this $8 trillion economy.
So why care? Because with a little imagination, that modest tax cut could encourage serious economic growth. We would like to see the entire sum go to promoting education and lowering taxes on work. Right now, the tax system is heavily biased against human capital. Taking the $500-a-child tax credit that both sides are proposing and turning it into a credit for education and training would be a big step. This would shift $70 billion away from probable consumption to certain investment in people's potential. We could go further and contemplate making all educational loans tax-deductible. Why should housing have preference over schooling?
Then we should think about cutting the Social Security tax. In addition to paying the 28% marginal income tax, many middle-income families bear the burden of their share and their employers' share of the 15.3% payroll tax. This 43% is a mighty disincentive for individuals and the self-employed. To help pay for the reduction, we would cut the cost-of-inflation index on Social Security and pass on part of the savings in lower payroll taxes.
Shouldn't capital-gains taxes be cut? In a perfect world, yes. But the U.S. economy is awash in physical capital. Thanks to the drop in the budget deficit, the government is borrowing hundreds of billions of dollars less each year from the capital markets, making it available to the private sector. With interest rates falling as a result, all capital is getting cheaper. We can take a momentary break on this front and pass some tax savings on to the human-capital side. It won't give candy to every political constituency, but it would make things simpler and encourage people to invest in themselves.