President George W. Bush's tax relief package, by reducing tax rates on work, saving, and investment, will boost economic growth and reduce the burden of government for all taxpayers; but it should also be viewed as only a first step. The White House and congressional leaders should put further tax relief and reform on the agenda because:

• The tax burden is still too high, inhibiting economic growth. Because many tax rates remain too high, federal tax revenues are expected to climb from $2 trillion to $3.5 trillion over the next decade.
• Additional tax cuts can bring us closer to a flat tax. Pro-growth tax cuts, such as repeal of the capital gains tax, expensing of business investment, and universal IRAs, are important reforms that move the Internal Revenue Code closer to a flat tax.
• A lower tax burden will help control federal spending. Budget surpluses between 1998 and 2001 undermined fiscal discipline. Indeed, federal spending grew twice as fast when the budget was in surplus as it did when the budget was in deficit.
• Pro-growth tax reforms enhance international competitiveness. America's overall tax burden is low compared to Europe's, which helps explain why our economy is stronger. But some changes, such as eliminating worldwide taxation of corporate income, would help ensure that the United States remains the world's strongest economy.

Lawmakers should remember that simply handing money to people--for example, through rebates and credits--does not stimulate additional economic activity. Tax cuts will improve the economy's performance only if they increase incentives to work, save, and invest. To generate economic benefits, tax reform should focus on three goals:

1. Lower rates. A tax cut that reduces marginal tax rates will boost incentives to create jobs, increase income, and generate wealth.
2. Less double taxation of savings and investment. Income from savings and investment often is taxed more than once. This anti-capital bias in the tax code reduces productivity growth and makes America less productive.
3. Simplicity. Eliminating some of the most counterproductive and confusing sections of the tax code would substantially reduce the tax system's huge $200 billion compliance burden.

Fortunately, there are many tax cuts that satisfy these criteria. With regard to both the personal income tax and the corporate income tax, the options include:

• Accelerated tax rate reduction. Much of the Bush tax cut, including rate reductions and death tax repeal, does not take effect until 2004, 2006, and 2010. Deferring rate reductions inevitably means that their economic benefits also will be delayed. All scheduled tax rate reductions should take effect immediately.
• Permanent tax cuts. Almost all of the tax cuts approved last year will disappear in 2011. Even the pro-growth provision of the 2002 stimulus bill--easing the depreciation tax on business investment--vanishes after just three years. To ensure that rate reductions have a significant effect on growth, all supply-side tax cuts should be made permanent.
• Capital gains relief. Like the death tax, the capital gains tax is a form of double taxation that should be abolished. It penalizes investment, hinders capital mobility, suppresses job growth, and undermines U.S. competitiveness. At the very least, reducing this tax would boost financial markets and be a big step toward a simple and fair tax code.
• IRA expansion. People should not be double taxed on income that they save and invest. To eliminate this bias in the tax code, all savings should receive IRA treatment. For simplicity and privacy, the back-ended (Roth) IRA is preferable, but any shift toward a system that taxes income only once would be an improvement.
• Repealing the alternative minimum tax (AMT). The alternative minimum tax is a parallel tax system for individual and corporate taxpayers deemed to benefit from "too many" deductions, credits, and other preferences. Many tax code preferences should not exist, but the AMT is an extremely costly and inefficient way of addressing the problem.
• Ending double taxation of dividends. The income earned by shareholders is taxed twice--by the corporate income tax and then by the personal income tax. As a result, the actual tax rate imposed on corporate earnings can be well over 50 percent. This anti-investment feature should be abolished, preferably at the individual level for reasons of simplicity and privacy.
• Corporate rate reduction. Corporations do not pay tax; they simply collect taxes that are borne by shareholders, workers, and consumers. Reducing the corporate tax rate will improve incentives to invest and make U.S.-based companies more competitive in the global economy.
• Territorial instead of worldwide taxation. The United States taxes income earned in other countries. This policy results in heavy compliance costs, interferes with the sovereignty of other nations, and puts U.S. companies at a competitive disadvantage. A territorial system, by contrast, only taxes income earned in the United States and will make American companies more competitive.
• Expensing instead of depreciation. When a business makes an investment, it often is not allowed to subtract that cost immediately when determining taxable income. This punishes companies for boosting worker productivity. Allowing those costs to be deducted when they are incurred would greatly simplify the tax system and increase incentives to invest.

Lower tax rates on productive behavior lead to a stronger economy because workers, investors, and entrepreneurs are not penalized for creating wealth. Good tax policy also helps control the size of government by reducing tax revenues and keeping resources in the productive sector of the economy. The tax reforms listed above are a good first step toward overdue reform.

Daniel J. Mitchell, Ph.D., is McKenna Senior Fellow in Political Economy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.