A critique Of US tax policy

October 2, 2002

Free Market Foundation

A recent study for the Organisation for Economic Co-operation and Development (OECD) concludes that the U.S. tax system is unnecessarily inefficient and complicated. The study recommends that the United States reduce its heavy tax burden on capital income, praises major elements of the 2001 tax act for cutting high marginal tax rates, and deplores the alternative minimum tax and many income-based phase-outs. Given the OECD’s generally pro-tax attitude, these findings are especially noteworthy and credible.

If replacing the income tax with a consumption tax is too big a change, the OECD study suggests reducing corporate tax rates, integrating the taxation of corporations and individuals and cutting the capital gains tax rate.

Efficiency gains might also flow from lowering the top marginal tax rates on income and extending the scope of saving schemes that allow tax-free accumulation of income until the money is spent.

The OECD economists observe that income tax complexity at the business level usually receives short shrift politically in this country, but conclude, “It is in the area of corporate taxation where most simplification is required, as compliance is particularly expensive.”

The OECD finds the best reform would be to scrap the income tax entirely and replace it with a tax that is neutral between saving and consumption.

Finally, the study argues strongly that most economic improvement will come from lowering high marginal rates and lessening biases against saving and investment. It concludes that permanent tax reforms will be far more beneficial than temporary ones.

Source: Richard Herd and Chiara Bronchi, Even the OECD Criticises the U.S. Tax System’s Inefficiency, IRET Congressional Advisory, Advisory No. 128, May 3, 2002.

For IRET text ftp://ftp.iret.org/pub/ADVS-128.PDF
For more on Current Tax Legislation http://www.ncpa.org/iss/tax