Compared with taxation under the current rates, the marriage penalty is reduced, but not eliminated. Narrowing the range of rates is a less radical approach to tax reform than the others discussed here. However, narrowing of the range of tax rates applied to earned income will also likely lead to the elimination of some popular deductions, such as deductions for state and local taxes and charitable contributions. Many economists believe that any reduction in marginal tax rates will lead to greater work effort and, in the aggregate, such tax reform benefits the economy. The tax reforms implemented in the early 1980s during the Reagan Administration reduced the range of income tax rates by a considerable amount.
Capital gains tax reform.
Many Republicans in Congress have advocated reducing the tax rate on capital gains relative to the rates applied on earned income. They see this as a means of encouraging investment, ultimately leading to a more rapidly expanding and productive economy. They question the impact of a capital gains tax cut on overall economic growth. No one likes to pay taxes, but tax revenue is needed to purchase the services provided by government. Any modification in tax law that reduces income to the federal government from one source must be balanced with increased tax revenue from other sources.