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Transition Strategies in Fundamental Tax Reform

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.
   
type journal paper
   
keywords Keywords: cash-flow taxes, ACE tax, investment, unemployment, transition
policies.
   
language English
kind of paper journal article
date of appearance 6-2012
journal National Tax Journal
publisher National Tax Association (Washington)
ISSN 0028-0283
ISSN (online) 1944-7477
volume of journal 65
number of issue 2
page(s) 357-386
review blind review
   
citation Keuschnigg, C., & Keuschnigg, M. (2012). Transition Strategies in Fundamental Tax Reform. National Tax Journal, 65(2), 357-386.