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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.

The November-December 2001 issue of IPI Insights, our 8-page, full-color policy newsletter. In Adobe Acrobat PDF format only.

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.”

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.