THINKING SENSIBLY about tax reform requires that one have in mind an ideal tax system against which proposals can be evaluated. Without such an ideal, one cannot decide whether any proposed change is an improvement. Unfortunately, people disagree strenuously about what the ideal tax system should look like. Many think that the tax system should be used to influence private economic and social choices. Many others hold, as we do, that frequent use of the tax system to change private incentives will lead to inequity and unintended distortions.
Disagreements on the nature of the ideal tax system extend beyond the question of the system's purpose. They also encompass the most fundamental issue for levying taxes: what is the best way to measure an individual's ability to pay? Some hold that annual income (measured as the sum of consumption plus additions to net worth over the year) best measures ability to pay taxes. Others claim that income measured over many years or that annual consumption expenditures are better measures.
This chapter examines many of the issues about which tax reformers disagree and provides necessary background for evaluating the various plans detailed in chapters 3, 4, and 5. We warn readers that this chapter may not be easy going despite our best efforts to be clear and straight- forward. But the issues raised here are important. It is impossible to think straight about tax policy options without a thorough understanding of the objectives sought in a desirable system.
The chapter is divided into four parts. The first concerns whether taxes should be used not only to collect enough money to pay for public expenditures but also to promote social and economic objectives. The second and third parts examine the concepts of fairness and economic efficiency, respectively, and the principles of taxation that emerge from them. The fourth part covers enforcement and compliance and the problems of transition following tax reform.