Economic Effects of Fundamental Tax Reform

HENRY J. AARON and WILLIAM G. GALE, eds., Economic Effects of Fundamental Tax Reform (Washington, D.C.: Brookings Institution Press, 1996, pp. xvii, 521, $52.95).

Tax reform recently has received much attention. Unlike the tax reform that took place in 1986, the objective of this tax reform is not merely to improve the existing tax system. Instead, its proponents want to replace it with a consumption tax, eliminating the federal income tax by "ripping it out by its roots."

This book contains papers from a Brookings Institution conference on fundamental tax reform (i.e., a switch from an income-based tax to a consumption-based tax). The authors of the papers attempt to predict some of the economic effects of such a switch. Their analyses generally focus on four forms of consumption-based taxes: the "flat" tax, the USA (unlimited savings allowance) tax, a value-added tax, and a national sales tax.

The book begins with an overview of the pertinent issues, a description of the major tax reform proposals, and summaries of the other chapters. The next two chapters focus on macroeconomic effects. In chapter 2, the effects of fundamental tax reform on aggregate economic performance are simulated, and the results suggest welfare and efficiency gains. Chapter 3 examines the impact on household savings and predicts only a modest increase, partly because the current tax system treats much savings in a manner similar to a consumption tax (e.g., employer-provided pensions).

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