Tax Reform Goals

October 10, 2017

The Trump administration and congressional Republicans are refining their tax reform plan and ramping up their marketing efforts. It is a good plan so far, but comments by some GOP leaders suggest that reforms may veer off-course as more details emerge.

To keep policymakers focused on true reform, the table below summarizes five tax reform goals and the policy changes needed to achieve each.

Tax reform is sometimes portrayed as a balancing act with various goals in conflict. But the table indicates the opposite. By adopting a lower, flatter rate structure and a more neutral tax base, policymakers would further multiple objectives at once: growth, simplification, fairness, and the strengthening of support for limited government.

Tax Reform Goals

Goal Policy Change Comments
1) Economic Growth Low flat rate.
Neutral Base.
Lower, flatter tax-rate structures cause much less damage because distortions rise with the square of marginal tax rates. Also, higher earners respond more strongly in their working, investing, and avoidance activities than do lower earners. Eliminating deductions, credits, and other breaks would create a more neutral tax base that allowed resources to flow to the highest-valued uses. Reforms should also reduce the income-tax bias against saving and investment.
2) Simplification Low flat rate.
Neutral Base.
A simpler rate structure and more uniform base without narrow breaks would reduce costs of tax administration, compliance, and enforcement, and it would make economic decisionmaking easier.
3) Fairness Low Flat Rate.
Neutral Base.
People differ on their views about fairness, but one approach would be for everyone to pay tax at the same rate above a large exemption amount. Fairness also means that the government does not micromanage society with deductions and credits that favor some people over others.
4) Limited Government Low Flat Rate.
Neutral Base Visibility.
Taxes that are simple, visible, and spread equally best convey the large cost of government to voters. H. L. Mencken said, “Democracy is the theory that the common people know what they want, and deserve to get it good and hard.” Pressure groups are always demanding higher government spending, but that needs to be countered by taxes that common people feel good and hard.
5) Starve the Beast Slash Revenues. Slashing revenues is a dubious way to shrink the government because deficits have not induced policymakers to cut spending. That said, tax reforms should aim for a revenue loss in official scoring to grease the skids for passage and to compensate for scoring methods that undervalue the dynamic benefits of reform.

For more on …

Principles of tax reform, here.

Advantages of consumption-based taxes, here.

Reforms to boost saving, here.

Reforming the corporate tax, here.

International tax competition, here.


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