Corporate Income Taxation and U.s. Economic Growth

In June 2001 President George W. Bush signed the Economic Growth and Tax Relief and Reconciliation Act into law, initiating a ten-year program of tax reductions in personal taxes. In January 2003 the President authorized the Jobs and Growth Tax Relief Reconciliation Act of 2003, substantially reducing taxes on business income. The tax legislation of 2001 and 2003 led to major reductions in federal revenue. In January 2005 President Bush convened the President’s Advisory Panel on Tax Reform. The Panel presented its report, “SIMPLE, FAIR, & PRO-GROWTH: Proposals to Fix America’s Tax System” in November 2005. The tax reform proposals of the President’s Advisory Panel are designed to be “revenue-neutral”, so that federal revenue would not be affected. Pamela Olson, U.S. Treasury’s top tax official in 2002, emphasized revenue neutrality in a memorandum to then-Secretary Paul O’Neill, “Tax Reform Materials.” 1 This was an important objective of the Tax Reform Act of 1986 and insulated the two-year debate over tax reform in the mid1980’s from the contentious issue of the federal deficit. Olson divided the Treasury’s tax reform programs between short-run measures to simplify the tax code and long-run proposals to reform the tax system. It is important to emphasize that there is no conflict between these goals. Somewhat paradoxically, tax simplification is necessarily complex, since it would eliminate many, but not all, of the myriad special provisions of tax law affecting particular transactions. By contrast tax reform is relatively straightforward.2 The major objective of tax reform is to remove barriers to efficient capital allocation. These arise from disparities in the tax treatment of different forms of capital income. The centerpiece of the Bush Administration’s 2003