Wednesday, May 25, 2011
The Tax Reform Act of 1986 combined base broadening (such as the curtailment of tax expenditures) with a reduction in tax rates, in a manner designed to be revenue neutral and distribution neutral. It established an influential model for tax reform that continues to be cited frequently. This report argues, however, that while 1986-style tax reform was a good idea in its time, it is no longer appropriate for three main reasons. First, if tax expenditures are properly viewed as spending through the tax code, a revenue neutrality norm in which the budgetary gain from their repeal ostensibly needs to be offset by rate cuts is intellectually incoherent. Second, the long-term U.S. fiscal gap makes rate-cutting, in particular for individuals, potentially imprudent. Third, if one wants to address rising high-end income concentration in the United States since 1986, the option of raising, rather than reducing, the top marginal income tax rates may need to be squarely considered.
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