A number of proposals have been proposed for tax reform. These include a distributed profits tax to replace our overly complex regime for taxes on foreign and domestic corporate profit, elimination of taxes at death, and simplification of the treatment of capital gains and other items in the federal income tax code. These changes would cut compliance costs for individuals and businesses by more than $100 billion annually.
More fundamentally, however, the challenge of tax reform remains profound. The last major tax reform effort – in 1986 – was not an easy lift, and the possibilities for meaningful reform today are far different than they were 30 years ago.
The key is defining what we are trying to achieve with tax reform. Ultimately, it must be about increasing the amount of money the government collects, but it can also be about making that increase more progressive or less progressive, and even moving to a consumption-based system rather than an income-based one.
But if we want to achieve those goals, then we have to think about the underlying incentives and values that are at play. When someone tells you that a high capital tax will cause a flood of capital outflows or drastically reduce saving, they are arguing on efficiency grounds, showing you the effect such a policy would have in terms of distorted behavior. But if they are telling you that the high tax is unjust because affluent individuals and corporations deserve their wealth, they are arguing on value grounds.