Clarifying U.S. Tax reform

Abstract

This volume’s intriguing theme, contrasting the theory and practice of tax policy may be read in two ways. One refers to the increased attention now given to the practice of tax reform, turning away from the past preoccupation with theory. This may be a wholesome shift of emphasis, especially regarding the global setting in which future tax policy will have to function. But it should not be read to mean that practice is what really matters, leaving theory as a secondary, academic concern. Both matter: “theory” (here taken to mean the normative design of a good tax system) as well as “practice” (the feasibility of implementing it). Both perspectives are needed to design a sensible policy. Head taxes or randomly distributed lump sum taxes rank high on grounds of feasibility but low on grounds of theory. An accretion-based progressive income tax may be ranked high on normative grounds but low in terms of practice. Tax policy, therefore, must allow for both aspects and choose what is considered the best feasible if imperfect system. Our purpose here is to examine the relationship between these two perspectives, especially as they arise with regard to the definition of tax base and the choice of rate structure as now debated in the United States.