INTRODUCTION

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 January 2003 the President proposed a second round of tax cuts, leaving open the possibility, suggested by former Secretary of the Treasury Paul O'Neill, that the Bush Administration would propose a thoroughgoing reform of our tax system. Tax reforms must be carefully distinguished from tax reductions. Former Secretary O'Neill emphasized that any Bush Administration proposals for tax reform would be revenue-neutral, so that the federal deficit would be unaffected.

Pamela Olson, Treasury's top tax official, reiterated the goal of revenue neutrality in a Washington Post interview in October 2002. This was an important objective of the last major tax reform in 1986 and insulated the two-year debate over reform from the contentious issue of the federal deficit. Olson has 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, because 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.

A major objective of tax reform is to remove barriers to efficient allocation of capital that arise from disparities in the tax treatment of different forms of income.