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Transition Strategies in Fundamental Tax Reform
Journal
National Tax Journal
ISSN
0028-0283
ISSN-Digital
1944-7477
Type
journal article
Date Issued
2012-06
Author(s)
Abstract
This paper discusses transition strategies that might be used in moving from an
income tax to consumption based business taxes in the form of an R-base cash-flow
tax, an R+F-base tax, or an ACE (allowance for corporate equity) tax. While these three taxes have attractive neutrality properties, moving from the status quo to a new system often involves a diffi cult trade-off between short-run losses and longrun gains. We consider two alternative ways of spreading the gains and costs of reform more evenly across generations. Defi cit fi nancing of the large revenue loss that occurs immediately after reform allows the smoothing of wage tax rates over time and the elimination or reduction of short-run income losses. Alternatively, a system of delayed deductions requires fi rms to carry forward with interest some of the large deductions that are newly available after the enactment of a major tax reform. In shifting tax revenue from the future to the present, such policies are politically appealing, as they trade somewhat reduced future income gains for improved economic performance immediately after reform.
income tax to consumption based business taxes in the form of an R-base cash-flow
tax, an R+F-base tax, or an ACE (allowance for corporate equity) tax. While these three taxes have attractive neutrality properties, moving from the status quo to a new system often involves a diffi cult trade-off between short-run losses and longrun gains. We consider two alternative ways of spreading the gains and costs of reform more evenly across generations. Defi cit fi nancing of the large revenue loss that occurs immediately after reform allows the smoothing of wage tax rates over time and the elimination or reduction of short-run income losses. Alternatively, a system of delayed deductions requires fi rms to carry forward with interest some of the large deductions that are newly available after the enactment of a major tax reform. In shifting tax revenue from the future to the present, such policies are politically appealing, as they trade somewhat reduced future income gains for improved economic performance immediately after reform.
Language
English
Keywords
Keywords: cash-flow taxes
ACE tax
investment
unemployment
transition
policies.
policies.
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
National Tax Association
Publisher place
Washington
Volume
65
Number
2
Start page
357
End page
386
Pages
30
Subject(s)
Eprints ID
61463