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Which changes in tax policy will have the strongest economic benefit per revenue dollar? Reducing tax rates on capital, such as cutting the capital gains tax rate or shortening depreciation lives, would have the biggest economic payoff. Repealing the alternative minimum tax (AMT) would also be potent, though other proposals such as payroll tax cuts would have much less “bang for the buck.”

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.

Social Security can be privatized and deliver market returns with virtually no risk to workers by allowing financial institutions to make asset allocation decisions rather than workers. Employees from three Texas counties have had such accounts for 20 years and have dramatically outperformed Social Security without risk. These plans can be a national model for Social Security reform without risk.

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.

Several state organizations are promoting a new, "simplified" state sales tax system in order to tax e-commerce. While the current moratorium doesn’t prohibit states from collecting taxes within their own borders, it does prohibit them from creating new and discriminatory taxes. The Founding Fathers wanted states to compete against each other, even in taxation. Extending or making the current moratorium permanent would coincide with the Founders’ principles of federalism.

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