October 7, 2005

Countdown to Tax Reform

by Scott A. Hodge

As the nation awaits the November 1 deadline of the President’s Tax Reform Panel, the Tax Foundation has launched a new series of analyses under the banner "Countdown to Tax Reform".

During the weeks leading up to that deadline, the "Countdown to Tax Reform" series will release a handful of "Fiscal Facts" exploring various aspects of the current tax system, and highlighting potential avenues for reform. The series will release roughly two analyses per week, until the Tax Reform Panel releases its recommendations for fundamental tax reform.

To help motivate the new series, it's useful to remind ourselves of the core principles of tax policy that serve as the foundation for these analyses—and indeed, for all of the Tax Foundation's scholarship. Our economists keep these principles pinned over their desks as a reminder each day, and I hope you find them as useful and important as they do. Our principles of tax policy can summarized as follows:

Principles of Sound Tax Policy

Simplicity: Administrative costs are a loss to society, and complicated taxation undermines voluntary compliance by creating incentives to shelter and disguise income.

Transparency: Tax legislation should be based on sound legislative procedures and careful analysis. A good tax system requires informed taxpayers who understand how tax assessment, collection, and compliance works. There should be open hearings and revenue estimates should be fully explained and replicable.

Neutrality: The fewer economic decisions that are made for tax reasons, the better. The primary purpose of taxes is to raise needed revenue, not to micromanage the economy. The tax system should not favor certain industries, activities, or products.

Stability: When tax laws are in constant flux, long-range financial planning is difficult. Lawmakers should avoid enacting temporary tax laws, including tax holidays and amnesties.

No Retroactivity: As a corollary to the principle of stability, taxpayers should rely with confidence on the law as it exists when contracts are signed and transactions made.

Broad Bases and Low Rate: As a corollary to the principle of neutrality, lawmakers should avoid enacting targeted deductions, credits and exclusions. If such tax preferences are few, substantial revenue can be raised with low tax rates. Broad-based taxes can also produce relatively stable tax revenues from year to year.

We hope you enjoy the series, and look forward any feedback you may have on our work. Feel free to email us at tf@taxfoundation.org with any questions about the series.

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