Tax policy is becoming a hot issue now that the war in Iraq is over, the budget is before Congress, and the Presidential election is about a year and half away.

Shortly after the President's tax policy speech in January 2003, we prepared a detailed, 15-page analysis complete with data tables and comprehensive examples.   Below is an abbreviated explanation of the hot topics and our opinions.  We encourage all readers to review the more detailed version cited above.

We believe in disclosing our bias up front, which is toward small business owners and long-term economic incentives for individuals to start their own businesses and expand their workforce.

Dividend Tax Cut

The center piece of President Bush's economic policy is a proposal that income from dividends paid by a corporation to an individual be exempt from taxation.  We are highly skeptical of this approach.  While this may increase stock values and household net worth in the short run, we do not see how this proposal provides entrepreneurs with incentives to start new businesses, reduces the expenses of regulatory compliance (much of which is at the local level), or makes it more affordable to hire new workers.

Additionally, we are skeptical of tax policies that create preferred classes of income, which can often have unintended consequences.  For example, if investors seeking a fixed rate of return will pay no taxes on dividends but still must pay taxes on interest income from bond purchases or bank deposits, it is logical to assume that there is now a compelling force pulling money out of the banking system and bond markets, which could have some negative consequences.

We believe the better approach is to simply make the first $5,000 of capital gains, dividends and interest tax free.  The provides an incentive for the average household to save, without providing powerful incentives to pull money out of the banking system, or engaging in a social policy that taxes working people's wages more heavily than investors returns.

Our Jobs & Growth Solution: Permanent Cuts in the Payroll Tax

The public policy position we advocate and explain in detail in our Bush Tax Proposal Analysis from January 2003, is a permanent cut in the payroll taxes (Social Security and Medicare).  We propose three permanent changes to the payroll tax system:

(1) The first $10,000 in wages earned be exempt from payroll tax for both the employee and the employer.

(2) The payroll tax be reduced from 7.65% to 3.00%.

(3) The earnings cap on the Social Security portion of the payroll tax be eliminated, as is the case with the Medicare portion of the payroll tax.

We think such a plan will provide a strong incentive for businesses to hire new workers, especially younger workers who have some of the highest unemployment rates.  This also put cold hard cash in people pockets, which they can use to save, purchase goods and services, or pay down debt.