Tax Reform Options in the Real World

William G. Gale
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

October 1, 2005

The following appears as Chapter 2 in Toward Fundamental Tax Reform by Alan J. Auerbach and Kevin A. Hassett (American Economic Institute Press, 2005).


The basic description of a desirable tax system is broadly accepted: It should raise the revenues needed to finance government spending in a manner that is as simple, equitable, stable, and conducive to economic growth as possible. Although people agree that the current system clearly falls short of at least some of these goals, it is not easy to point to examples around the world that work much better. In addition, how the system should be reformed is subject to enormous controversy. People define the underlying goals differently—notions of fairness, for example, are clearly “in the eyes of the beholder.” People disagree on the most effective policies for attaining a particular goal, such as more economic growth. And most importantly, people have differing value judgments, which make agreement on policy almost impossible in the nearly ubiquitous case where there are tradeoffs among the goals.

In addition, although all of us are attracted to well-designed tax reforms, the real challenge is changing the system in a way that will work not only on paper, but also in the real world. In practice, the changes needed to make idealistic tax proposals acceptable in a world populated by politicians, lobbyists, tax shelter experts, and taxpayers who want their own individual taxes cut and who have strong, but malleable views on equity and enforcement almost always make taxes more complex, less fair, and less consistent with economic prosperity. Nevertheless, there is currently a real opportunity for tax reform that should be taken seriously.