The fundamental goal of tax policy is to raise enough revenue to meet the government’s minimal spending requirements without significantly changing behavior in a market economy. The US tax code has long failed to achieve this goal; by severely distorting market decisions and the allocation of resources, it impedes potential economic growth and reduces potential tax revenue.
The nation’s persistently sluggish economic growth and dire long-term fiscal outlook have increased the urgency of the need to reform the federal revenue system. But what does successful, sustainable tax reform look like? What are its key elements? And what would it achieve?
The Goals of Successful Tax Reform
Policymakers need not fly blind when it comes to defining the principles and goals key to an effective revenue system. Academic research suggests a tax system must be:
Simple. The complexity of the tax system makes compliance difficult and costly. Complexity also encourages tax avoidance. A simpler and more transparent tax code promotes compliance and increased revenues.
Efficient. The tax code impedes economic growth by distorting market decisions in areas such as work, saving, investment, and job creation. An efficient tax system provides sufficient revenue to fund the government’s essential services with minimal distortion of market behavior.
Equitable. Americans of all income levels believe the tax code is unfair. This perception is largely fueled by the code’s “loopholes”—or provisions intended to benefit or penalize select individuals and groups. “Tax fairness” should reduce or eliminate provisions that favor one group or economic activity over another, especially among equal-income earners.
Predictable. Tax certainty is a necessary condition for robust economic growth and investment, and it enhances competitiveness. An environment conducive to growth requires a tax code that provides both near- and long-term predictability.
Achieving Successful Tax Reform
There is broad consensus in academic studies as to which foundational policies are most likely to promote solid, sustainable economic growth and result in stable tax revenues. There also is broad consensus as to which policies are most likely to fail.
Lower Rates. Economic research repeatedly proves this most basic effect: the more you tax capital or labor, the less you get. It also makes clear that incentives matter. Successful reform should lower current individual and corporate tax rates.