The President has proposed a bold and fair tax relief plan that will reduce the inequities of the

current tax code and help ensure that America remains prosperous. This tax relief plan promotes

the values that make the American economy second to none -- access to the middle class, family,

equal opportunity, and the entrepreneurial spirit. This plan will reduce taxes for everyone who

pays income taxes, and it will encourage enterprise by lowering marginal tax rates.

Under the President’s tax relief plan, the typical American family of four will be able to keep at

least $1,600 more of their own money.

Over the past several months, the economy has slowed dramatically. President Bush’s tax cut

will give the economy a timely second wind by placing more money in the hands of consumers

and entrepreneurs. President Bush also understands that, over the long run, wealth is created by

hard-working, risk-taking individuals, not government programs. Countries with low taxes,

limited regulation, and open trade grow faster, create more jobs, and enjoy higher standards of

living than countries with bigger, more centralized governments and higher taxes. The United

States has led the way in economic performance over the last century because America is a freer

country. If people are given the freedom to create, they do. If people are given a stake in the

outcome, they succeed.

President Bush’s tax relief plan reflects this basic trust in the American people and confidence in

the American ideal by increasing tax fairness and enhancing the performance of the economy. It

includes:

structure of 10, 15, 25, and 33 percent (see Appendix for rate schedule);

Minimum Tax (AMT);

couples;

The current tax code is full of inequities. Many single moms face higher marginal tax rates than

the wealthy. Couples frequently face a higher tax burden after they marry. The majority of

Americans cannot deduct their charitable donations. Family farms and businesses are sold to pay

the death tax. And the owners of the most successful small businesses share nearly half of their

income with the government. President Bush’s tax cut will greatly reduce these inequities. It is

a fair plan that is designed to provide tax relief to everyone who pays income taxes.

High marginal tax rates act as a tollgate, limiting the access of low and moderate-income earners

to the middle class. The belief that any worker, with enough effort, can join the middle class is at

the heart of the American Dream. But when government attempts to help the poor by simply

redistributing income, it often undermines incentives to work harder and earn more.

Because the benefit of the Earned Income Credit diminishes as a worker’s income increases, a

single mother with two children on the outskirts of poverty will lose nearly half of any additional

dollar she earns (taking into account social insurance taxes, state income taxes, and federal

income taxes). The benefit of taking an extra training course, working an extra shift, or assuming

additional responsibility is cut in half by the government. As a result, a single mother with two

children earning $25,000 a year faces a higher marginal tax rate than a lawyer earning $250,000.

Lowering these barriers to the middle class is one of President Bush’s top priorities. To provide

a greater reward for those who make the sacrifices needed to move ahead, the President’s tax cut

plan will substantially lower the marginal tax rate for low-income parents. The marginal federal

income tax rate would fall by over 40 percent for low-income families with two children (see

Chart 1), and by nearly 50 percent for families with one child. These lower rates result from two

key changes in the tax code:

for singles, the first $10,000 for single parents, and the first $12,000 for married couples; and

Federal income tax revenue rose dramatically in the 1990s. Today, federal taxes from all sources

are the highest they have ever been during peacetime, topping 20 percent of GDP. High taxes

force families to work harder each year to fuel a growing government. Overall, Americans now

work over four months of the year to fund government at all levels.

This high tax burden strips families of resources needed to help solve their most pressing

problems. Every family faces different challenges: some need better childcare, some need

tutoring for their children, and others need a greater variety of after-school programs.

Government cannot tailor its programs to the needs of each family. That is why President Bush

spend it as it deems appropriate. His plan will lower the tax burden on families by, among other

things, reducing tax rates, expanding the child credit, and reducing the marriage penalty. His

plan will also raise the threshold for the phase-out of the child tax credit from $110,000 to

$200,000 for married couples, and from $75,000 to $200,000 for single parents.

The current tax code frequently taxes couples more after they get married. This marriage tax

contradicts our values and any reasonable sense of fairness. President Bush’s tax relief plan will

greatly reduce the marriage penalty by restoring the deduction for two-earner families. This will

allow the lower-earning spouse to deduct 10 percent – up to $3,000 – of the first $30,000 of

income. The marriage penalty will be further mitigated by lowering marginal tax rates, which

will reduce the portion of the marriage penalty that is derived from a steep rate structure.

When President Bush’s proposal is fully in place, the typical family with two children will

receive at least $1,600 in tax relief. This is real and practical help:

In addition to making the tax code more fair, President Bush’s agenda will also improve the

performance of the economy. His tax cut will help prevent a prolonged economic downturn, and

it will encourage innovation. His plan will also allow workers to pay down consumer debt, while

leaving growing surpluses to pay down a record amount of public debt.

The evidence that the economy is slowing continues to build:

Every week we hear about another round of layoffs. Last month, Federal Reserve Chairman

Alan Greenspan testified that the economy had almost stopped growing. President Bush believes

that the best way to ensure that prosperity continues is to put more money in the hands of

consumers and entrepreneurs. That is why he advocates cutting tax rates now. President Bush

will work with the Congress to accelerate a portion of his tax plan to the beginning of 2001. An

immediate tax cut would give the economy a timely second wind.

Although the federal government is facing an enormous surplus, many Americans are not.

Consumer debt has reached an all-time high and now exceeds $1.5 trillion (see Chart 3). Credit

card debt alone totals over $600 billion, more than $2,000 for every man, woman, and child in

the country. This high debt level will eventually restrict consumer spending. And if consumer

spending slows, the economy will slow also. Tax relief would give these families the ability to

pay down their debt.

One of the most powerful tools the federal government has to raise standards of living is to lower

marginal tax rates. The marginal tax rate is the tax on each additional dollar of income. The

lower the marginal rate, the greater the incentive to find a better job, to save for the future, or

start a new business. Lower marginal tax rates also leave more resources with innovative

entrepreneurs, instead of funding government bureaucracies.

The marginal tax cuts of the 1980s helped generate the venture capital that is now fueling the

growth of the Internet and other technologies. New technologies are boosting productivity and

economic growth by helping companies achieve new efficiencies. In this environment,

entrepreneurship has become the path to prosperity for many minorities, women, and young

people. Yet, today’s high marginal tax rates tend to penalize continued innovation and business

formation and expansion.

High marginal tax rates inhibit entrepreneurial activity because they act as a success tax,

claiming a larger share of income from flourishing enterprises, while the government shares little

of the risk of loss. For most entrepreneurs, income taxes reduce their companies’ cash flow – the

money businesses need to expand, buy more equipment, and hire more workers.

To ensure continued innovation, President Bush believes the tax system should be revised to restore

incentives for success. In this period of revolutionary technological change, the government should

leave as many resources as possible with the entrepreneurs and companies that are generating new

ideas, better jobs, and greater wealth. The President’s tax relief plan will cut the top marginal rate,

which many small businesses pay, from nearly 40 percent to 33 percent. Reducing the top rate will

spur entrepreneurial activity and investment, helping to attract the best workers from around the

globe to America.

Another impediment to innovation and economic growth is the uncertainty surrounding whether the

current Research and Experimentation tax credit will continue to exist. The tax credit was originally

enacted in 1981 and currently provides companies with a 20 percent tax credit for incremental R&D

expenditures. The credit encourages the technological developments that are an important

component of economic growth. However, extensions of the tax credit have resulted in three gaps in

coverage, two of which were retroactively filled. The on-again, off-again nature of the tax credit

impedes long-term research in the U.S. Thus, President Bush will make the Research and

Experimentation tax credit permanent. This should help spur the sustained, long-term investment in

R&D that America needs to develop the next generation of critical technologies.

The death tax also impedes economic growth because it levies yet another layer of taxes on

capital. More capital investment means higher incomes for all workers. Since the marginal

federal tax rate on savings can reach 68 percent (the 40 percent top income tax rate combined

with the effect of the 55 percent top death tax rate and the state death tax credit), the death tax

can also create a disincentive for seniors who want to save for their children or grandchildren.

The punitively high death tax can fall most heavily on small businesses and family farms that are

asset rich but cash poor. According to a 1993 survey, nine of ten successors whose family

businesses failed within three years of the owner’s death listed the death tax as a contributing

factor. Finally, by encouraging intricate planning techniques to reduce taxes, the death tax has

created an entire industry of specialized lawyers and accountants. The added complexity and

compliance costs make this one of the least efficient federal taxes.

President Bush believes that the bias of the death tax against the family farm and family business

is the antithesis of the American Dream. Accordingly, his tax relief plan will eliminate the death

tax. Eliminating the death tax will allow family farms and businesses to be passed from one

generation to the next without having to break up or sell the assets to pay a punitive tax to the

federal government. As a result, wealth would be taxed only when it is earned, not again when

entrepreneurs and senior citizens pass the fruits of their labors to the next generation.