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International Economy: Can Tax Reform Save the U.S. Economy?

Winter 2012

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This report by International Economy presents views of several influential economic thinkers on whether enactment of tax reform should be a top priority.

With U.S. public debt rising as a percentage of GDP, reform of the personal and corporate income tax codes has been suggested as a solution to achieving the twin goals of deficit/debt reduction and higher rates of economic growth.

Two important American economists have reached opposite conclusions on this issue. Martin Feldstein argues that the Tax Reform Act of 1986 "showed how a tax reform that includes lower rates can change incentives in a way that grows the tax base and produces extra revenue." Feldstein argues that the 1986 experience "showed an enormous rise in the taxes paid, particularly by those who experienced the greatest reductions in marginal tax rates." In view of today's budget shortfall, he suggests that the flattening of the tax code after the 1986 tax reform "implies that the combination of base-broadening and rate reduction would raise revenue equal to about 4 percent of the existing tax revenue," potentially "more than $500 billion in savings over the next ten years."

Alan Blinder concedes that both the U.S. personal and corporate tax codes are "disgracefully complicated messes." He argues, however, that "flattening the rate structure won't make the tax code any simpler. It would, however, make the tax system far less progressive" and thus less fair. Blinder also notes the political difficulty of reforming the tax code: "Every tax 'gimmick' has an engrained constituency. I shake my head in disbelief when I hear politicians claim to be able to raise huge amounts of revenue by closing loopholes. Arithmetically, that's easy. Politically, it's almost impossible." Blinder adds that "many useful steps could be taken to simplify the personal income tax…but flattening the rate structure isn't one of them…The corporate income tax is virtually flat once a corporation passes a paltry $750,000 in taxable income. Is it simple?"

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