It gives me great pleasure to welcome the distinguished panel of witnesses before us today to examine the economic problems posed by the federal income tax system.
The federal income tax system was introduced in 1913 with a top marginal tax rate of 7 percent and personal exemptions that excluded the vast majority of Americans from the income tax. To many Americans these days, this kind of income tax structure wouldn't sound so bad. However, our current tax system features much higher income tax rates and lower real exemption levels. Furthermore, the current income tax continues the systematic bias against saving common to all income tax systems.
The general problem is that saving is taxed once out of income, and then the return to saving is taxed yet again. This multiple taxation of saving has a variety of forms that can cascade upon one another, a problem that will probably also be discussed this morning. It is true that the current income tax system attempts to soften the extent of this bias by curtailing some of this multiple taxation in a variety of ways, including limited IRA treatment of some personal saving. Nonetheless, the current tax system remains stacked against personal saving. By undermining personal saving, it also undermines investment and long term economic growth as well as personal responsibility.
The rate structure and multiple taxation of saving and investment of the federal income tax also hinders the entrepreneurship, innovation and creativity which are vital to the flexibility and dynamism of a market economy. The incentive for entrepreneurial discovery leads to unforeseeable breakthroughs and innovations that would not occur in a adverse tax environment. The federal income tax, in a variety of ways, impedes entrepreneurship and innovation in the economy seriously enough to limit long term economic growth.
A neutral tax system would not discriminate against saving on the one hand or consumption on the other. It would not tax saving more heavily than consumption, but would tax them both in an unbiased manner. The additional layers of multiple taxation on saving would be stripped away to establish an unbiased tax treatment of saving and consumption. The larger pool of personal saving would increase the amount of capital available to finance capital formation and economic growth.
Recently I have introduced legislation to address this imbalance by increasing the deduction ceilings for IRA accounts, raising income caps for deductible IRA contributions, and liberalizing withdrawals for all education and medical expenses, first time home ownership, unemployment, and adoption. This legislation would go a long way towards correcting the current defects in our current tax system. Much more would need to be done in the longer term, but this IRA liberalization would be a good place to start.
This morning we are fortunate to have a distinguished panel of tax experts testifying before the committee. Dr. Lawrence Lindsey was formerly a governor of the Federal Reserve Board, served as a White House advisor, and also as a Harvard University professor. Dr. Norman Ture, currently President of the Institute for Research on the Economics of Taxation (IRET), has served as a high official in the Treasury Department, and many years ago on the staffs of the Joint Economic and Ways and Means Committees. Dr. Barry Rogstad is chairman of the American Business Conference. Dr. Lawrence Chimerine is managing director and chief economist of the Economic Strategy Institute.
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