Return of the Death Tax: How Tax Rate “Reductions” Will Turn Into Tax Rate Increases

by | Mar 5, 2002

Some conservatives may be grumbling about the fact that Senate Majority Leader Tom Daschle single-handedly killed President Bush’s plan to “stimulate” the flagging economy shortly before the Christmas recess. But they shouldn’t. The president had made so many compromises to try to get a bill through that stimulus legislation that began as red meat wound […]

Some conservatives may be grumbling about the fact that Senate Majority Leader Tom Daschle single-handedly killed President Bush’s plan to “stimulate” the flagging economy shortly before the Christmas recess. But they shouldn’t.

The president had made so many compromises to try to get a bill through that stimulus legislation that began as red meat wound up as watery soup. Wasteful spending replaced supply-side tax cuts. Welfare-state policies replaced free-market principles. It was an economic plan that would have made America look a lot like France, with little growth and pervasive joblessness.

But thanks to Sen. Daschle, the Bush administration and pro-growth members of Congress have a chance to start anew and propose a package that will put people back to work and make America’s economy more productive.

This “stimulus” package could include many of the same proposals the administration asked for last year. For instance, the president asked Congress to speed up implementation of the tax-rate reductions approved in June 2001. Congress should waste no time in doing so. After all, how does it help the economy today to hold off on tax-rate reductions until 2004? [When I Democrat has a chance of being elected? –Editor]

It would be a mistake, however, for lawmakers to focus solely on short-run stimulus when a more pressing problem needs to be dealt with: Many of the tax-rate reductions approved last year, as well as some of the tax cuts now being considered as part of a stimulus package, are set be repealed in 2011 or sooner.

Indeed, these “built-in” tax increases lie in wait to ambush the economy in future years. And as we approach 2011, investors, entrepreneurs and small-business owners will be forced to lay off workers and reduce production.

Consider two examples. First, the cuts in personal income-tax rates disappear in 2011. This means taxpayers in the 25-percent tax bracket will be pushed to the 28-percent tax bracket. The tax rate on investors, entrepreneurs and small-business owners, meanwhile, will jump from 34 percent to nearly 40 percent. This can’t help but discourage job creation and risk-taking by many of America’s most productive citizens.

Second, consider repeal of the inheritance, or “death,” tax. President Bush asked Congress to repeal this unfair version of double taxation (remember, the money was taxed when it was earned) not only to remove inequity in the tax code but to pursue sound economic policy. He knows that the economy suffers when families divert resources into tax shelters to avoid this punitive levy. By contrast, jobs are created and the economy grows when small-business owners seek to maximize income rather than minimize tax.

The good news is that Congress listened

Daniel J. Mitchell, Ph.D. is McKenna Senior Fellow in Political Economy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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