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Tax Reform: Marginal Rates, Incentives, and More

Congressional momentum for tax reform has grown in recent years, with the Senate Finance and House Ways and Means Committees hosting numerous hearings and listening sessions around the country, publishing option papers and discussion drafts, and releasing comprehensive plans. The most recent of those was released yesterday by Ways and Means Chairman Dave Camp (R-MI).

While political disagreement remains over the level of revenue that the tax code should produce, leaders on both sides of the aisle have indicated support for tax reform that would broaden the tax base and reduce rates. Bipartisan plans for tax reform, including that of the Domenici-Rivlin Debt Reduction Task Force, generally propose to broaden the base by limiting or eliminating tax expenditures?in the form of deductions, credits, and exclusions?and lowering statutory rates. The magnitude of expenditures in the U.S. tax code is large enough that such a reform can be revenue-neutral (produce the same amount of revenue as the current system) or produce more revenue than the current system, even while lowering rates.

The fact that this type of tax reform can improve economic functioning is often discussed, but the reasons why are less frequently addressed. In this primer, BPC presents some of the fundamental concepts for considering tax reforms, related policy considerations, and the potential benefits of this general tax reform approach.

This report is the result of discussions with a working group comprised of Alice Rivlin of the Brookings Institution, Joe Minarik of the Committee for Economic Development, Donald Marron of the Urban Institute, and Len Burman and Eric Toder of the Tax Policy Center.

Government Accountability Office Report
Understanding the Tax Reform Debate: Background, Criteria, & Questions

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