Policy Report

One of President Bush’s most controversial campaign proposals was to let workers place a portion of their Social Security payroll tax into a personal account. Can such accounts avoid the risk associated with the stock market? Twenty years ago, three Texas counties opted out of Social Security and they have never lost a dime. These counties provide a real, working model for personal accounts that are as safe as a bank.

One of President Bush’s most controversial campaign proposals was to let workers place a portion of their Social Security payroll tax into a personal account. Can such accounts avoid the risk associated with the stock market? Twenty years ago, three Texas counties opted out of Social Security and they have never lost a dime. These counties provide a real, working model for personal accounts that are as safe as a bank.

The Constitution originally forbade direct, invasive taxes. The Sixteenth Amendment removed this protection and gave birth to the modern income tax, sacrificing our individual liberties, our legal principles and protections to government’s insatiable desire for revenue. A primary criterion for tax reform should be the restoration of the individual liberties intended by the Founders.

A capital gains tax cut would reliably stimulate economic growth. Historically, there is a strong relationship between capital gains tax cuts and overall economic growth. Over the past 30 years, every time the capital gains rates have been cut, capital gains revenues have risen. And now that almost half of all Americans own stock, a capital gains tax cut can no longer be said to benefit only “the rich.”

Meaningful tax reform requires a better understanding of how taxes interact with the economy. Whether its called an income tax, a payroll tax, a sales tax, a consumption tax, a business tax or a property tax, all taxes are paid out of the income people earn with their labor and capital. The current tax code needlessly hamstrings the economy because marginal tax rates exceed average tax rates. The method of accounting presented here offers a starting point to assess how well proposals for tax reform measure up to the current system and to each other.

Federal income taxes represent only 42 percent of the total tax burden of U.S. taxpayers. The remainder is hidden, distorting taxpayers’ awareness of their real tax burden and of the true cost of government. Only fundamental tax reform with an emphasis on visibility can ensure a fair tax code that allows taxpayers to evaluate whether they are getting their money’s worth from government.

National debt is widely and falsely feared. Prudent use of debt can be a tool of national greatness. Using debt to overhaul the current tax code and transition Social Security into pre-funded private accounts would significantly enhance the nation’s economic well being. The misguided consensus to “pay down the debt” will inevitably result in surpluses squandered and missed opportunities for future generations.

Over the past 40 years, taxpayers have supplied the U.S. public education system with steady improvements in funding, teacher pay, teacher credentials, and student/teacher ratios.Yet with these resources, public education has consistently failed to produce well-educated children; indeed, the quality of education has declined over time as measured by almost any standard. Centralization and unionization have removed parental voice and exit from the system, which can only be restored through school choice.

As the market for prescription drugs becomes more competitive, consumers have more choices of high-quality drugs at reasonable prices. It is competition and DTC advertising — not government regulation — that enables the choices and will enhance the benefits. If legislators and health policy experts want to ensure that more drugs are available at lower prices, they should consider policies that encourage advertising and competition. We have no reason to fear advertising; what we should fear is the people who want to control it.

The personal saving rate in the U.S. is alarmingly low — far too low to meet the retirement needs of the baby boomers. The very low saving rate restricts investment, which in turn retards economic growth. The culprit is the pervasive bias against saving that is built into almost every aspect of the tax code. Removing this bias against saving through tax reform could raise national income by 10 to 15 percent in 15 years.

This publication is part of the Road Map to Tax Reform™ Series