NCPA - National Center for Policy Analysis

How to Judge a Tax Plan

December 30, 2011

Tax reform has become the central issue in the presidential primaries and will likely remain an important issue in the general election.  While the plans and proposals will vary considerably in their scope and intent, it is important that they all be judged against a standard set of guideposts or principles that define a sound tax system, says William McBride of the Tax Foundation.

  • The fairness and neutrality of a tax system.
  • The complexity of a system and how costly it is to comply with it.
  • How the system affects U.S. competitiveness and economic growth.
  • How it affects the stability or volatility of tax revenues

In regards to fairness and neutrality along with the complexity of the tax code, the removal of "tax expenditures," also called "loopholes," should be made a priority.  These distortions manipulate the market and create enormous cost to comply with the tax code.

  • Loopholes amount to over $1 trillion per year, or equal to about 7 percent of gross domestic product.
  • These loopholes are split between individual income taxpayers and businesses, with 90 percent allotted to the prior and 10 percent to the latter.
  • The complexity of the tax code, caused in no small part by the proliferation of loopholes, creates an aggregate cost of tax compliance of approximately $400 billion each year.
  • This "deadweight" cost for compliance with the current individual income tax, amounting to roughly 11 to 15 percent of total income tax revenues, is equivalent to a burden of $110 to $150 billion on taxpayers and the economy.

The overall competiveness and economic growth of the country, especially in how the nation attracts multinational businesses, is also an important area of tax code analysis.

All four of these factors must be kept in mind as presidential candidates within the next year, and in future elections, share their goals for reforming America's tax system.

Source: William McBride, "How to Judge a Tax Plan," Tax Foundation, December 15, 2011.

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