Tax-cuts with a purpose.

The United States should not squander its opportunity to create a better tax code.

As the size of America’s pojected budet-surplus baloons! a strane new summer fe"eris spreadin around #ashinton$ tax-cut syndrome. %epublicans ha"e lon beenafflicted with the condition. &ow increasin numbers of 'emocrats are showin similarsymptoms. Top of the politicians’ hit lists are the estate tax! and the (marriae-tax penalty) * the quir+ in the tax code wich implies that some couples with two incomes pay more tax when they et married than if they were sinle. The ,ouse of the%epresentati"es has already "oted to repeal the estate tax on inherited property. As Theconomist went to press! the Senate was poised either to follow suit or at least radicallyto reduce its scope. A reduction in the marriae-tax penalty is also li+ely.

n both cases the lawma+ers are ma+in a mista+e. &ot because to cut taxes isintrinsically a bad idea. /oliticians should always see+ to lower taxes whene"er prudently possible. 0ut the problem with these tax-cuts is that they are moti"ated byshort-term political opportunism. #hat America needs is a loner-term stratey for taxreform.

The administration’s estimate for the cumulati"e ten-year budet surplus! excludinsocial security! was recently raised to 12.3 trillion 4two-and-a-half times bier than theestimate e"en fi"e months ao.5 That ma+es it increasinly difficult to arue that anytal+ of tax-cuts is insanely profliate. 0ut prudence still suest caution. "en a smallchane in the economic assumptions underpinnin the surplus projections can ma+e a bi difference. And the spendin forecasts are undoubtedly too low.

6i"en these uncertainties! 7onress should be leery of repealin taxes willy-nilly.nstead it should be thin+in about how to impro"e tax policy. 0y any measure!America’s tax code is notoriously complicated and riddled with exemptions8 these are a boon to accountants and a nihtmare to many taxpayers. Tax reform in the mid-239:s brouht some relief. 0ut since then! the 7linton administration’s determination to usethe tax code as a tool of social policy throuh innumerable tareted tax credits hasworsened the complexity.

Simplicity! efficiency and fariness are the traditional criteria aainst wich tax codesshould be juded. ;or some a system that focuses taxation on consumption ma+es themost sense. ;or others a flatter system of income tax! with fewer exemptions! is preferable. #athe"er path is chosen! the important tas+ now is to de"elop a strateyaainst wich indi"idual tax-cut proposals can be tested * and a few people’s idea ofserious reform would bein with the current proposals! wich toether could eat up afifth of the projected budet surplus o"er the next decade 4and much more thereafter5.

Thin+ first! cut later.

/erhaps the biest objection to his approach is the notion that the United States willne"er be able to aree on how to reform its tax policy. Therefore! it is probably better torab any tax-cuts that you can. This too is wron - and not just because hue tax-cutstill loo+ fiscally imprudent. After all! social-security reform! another supposedimpossibility! has now become part of the presidential campain. The presidential race

 

would also be a ood place to re+indle the debate about tax reform. 6eore #. 0ush’s bi across-the-board tax-cuts are already bein measured aainst Al 6ore’s pint-sized! poll-tested and tareted alternati"es. 0ut until the focus shifts from cuts to reform!7onress would be better off usin the surplus principally to pay down debt.