Time for US tax reform? The Reform Panel's recommendations

On 1 November 2005, the President's Advisory Panel on Federal Tax Reform issued its report, 'Simple, Fair, and Pro-Growth: Proposals to Fix America's Tax System'. As the title indicates, the panel attempted to craft proposals that would simplify the US income tax, be fair and be conducive to economic growth. It also attempted to comply with the additional constraints set by the Presidential directive of progressivity, revenue neutrality and continued encouragement of home ownership and charitable giving. The centerpiece of the report consists of two proposals, one that would drastically reform the existing income tax and an alternative approach that would combine a consumption-based direct tax, which has the effect of exempting the return on marginal investment, with an individual-level tax on financial income. This article describes and appraises these two proposals. Before doing so, the article gives an overview of the report, discusses the problems faced by the panel in defining revenue and distributional neutrality, and briefly considers three options the panel did not endorse.