Reflections of the Holland Medal Recipient: Perils of Tax Reform

Tax reforms dangle possibilities of improving the tax system, but are fraught with perils that are evident from the 2017 U.S. experience and caution against frequent reforms of its ilk. The first peril is that reforms containing tax provisions selected simply on the basis of their projected revenue contributions will produce less tax revenue than anticipated, illustrative calculations suggesting shortfalls of roughly 8‐16 percent. The second peril is that reforms will not advance the objectives of efficiency and tax equity to the extent that they include provisions intended to influence future tax legislation or government spending. The third peril is that reforms designed without sufficient appreciation of transitional gains and losses will offer inadequate and misdirected transition relief. And the fourth peril is that reforms stoke expectations of future tax changes, discouraging investment and encouraging costly tax avoidance. Tax reforms that apply sound principles will reduce or even avoid these perils.