Paul L. Caron

Tuesday, December 13, 2005

Burman & Gale on A Preliminary Evaluation of the Tax Reform Panel’s Report

Leonard E. Burman (Senior Fellow, Urban Institute; Co-director, Tax Policy Center) & William G. Gale (Arjay and Frances Fearing Miller Chair, Brookings Institution; Co-director, Tax Policy Center) have posted A Preliminary Evaluation of the Tax Reform Panel’s Report on the Tax Policy Center web site. Here is the abstract:

This paper summarizes the two options for reforming the tax system proposed by the President's Advisory Panel on Federal Tax Reform, offers a preliminary evaluation of the proposals, and discusses the overall effect on revenue, distribution, and growth. We have the following principal conclusions:

  • The report contains a number of interesting and important proposals that would generally move the structure of the tax system in the right direction.
  • However, for several of the broadest proposals (especially relating to business and international issues), the report omits important details.
  • The biggest problem with the report, however, is its assumed baseline. The panel's baseline assumes not only that the recent (2001-2004) tax cuts, which are currently scheduled to expire in 2010 or earlier, are made permanent, but that the proposals in the president's most recent budget are enacted. This baseline choice makes the revenue, distribution, and growth implications of the proposal appear much more favorable than they would be relative to a current-law baseline.
  • The panel's proposals not only dramatically cut tax revenues compared with current law, but also significantly reduce long-term revenue. To make the proposals revenue-neutral in 2015 relative to current law would require at least a 16% increase in marginal tax rates over those proposed by the panel, or substantially more base broadening. The distributional measures employed in the report can be very misleading, and the panel's claims that the proposals would be distributionally-neutral are less meaningful than might appear.
  • Through their effect on long-term deficits and national saving, the proposals are as likely to reduce economic growth as to increase it, relative to current law.

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