DP10922 A Positive Theory of Tax Reform

Author(s): Ethan Ilzetzki
Publication Date: November 2015
Keyword(s):
JEL(s): D72, D78, H26
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10922

The political impediments to reform and the forces allowing its success are studied in a model where the tax base and statutory rate are separate instruments of tax policy. The model predicts that big bang reforms?large changes in the tax code?may be easier to enact than marginal reforms. Preferences over the tax base face a tipping point where even the beneficiaries from tax exemptions support reform. At such a \reform moment", tax reform is Pareto improving. Politically feasible tax reform occurs when fiscal needs are large, but may nonetheless involve reductions in marginal tax rates. There is strategic complementary in lobbying for tax exemptions, resulting in multiple equilibria. Evidence from tax-base changes in a panel of OECD countries supports a number of the main predictions.