Bush's Tax Plan Makes Sense Martin Feldstein George W. Bush's opponents took turns attacking his tax-reform proposal during last week's New Hampshire debate. But Mr. Bush's plan is a good one. Because it emphasizes cutting marginal tax rates, it would significantly improve the economy's performance as well as increase after-tax incomes. And it's not just the rich who would benefit. High marginal tax rates are not reserved for those with high incomes.
Marginal rates can be higher still for low-income families.
A fiscal system in which the government takes nearly two-thirds of any extra income is a poverty trap. It is also a powerful temptation to shift to the underground economy, where work is often less productive and less well paid but more attractive because it is untaxed. The Bush proposal to double the child credit would totally eliminate the income tax for millions of such low-income families, reducing their marginal tax rate by 15 percentage points. Like the Bradley proposal, the increased marginal tax rate that results from phasing out the earned income credit is just one example of the high marginal rates that are a byproduct of almost all government transfer programs. The Social Security earnings test reduces benefits by 33 cents for every extra dollar earned above a threshold amount by Social Security recipients in their 60s.