The Impact on Efficiency and Distribution of a Base-Broadening and Rate-Reducing Tax Reform

We analyze a base-broadening, rate-reducing, and simplifying tax reform, which may be revenue-neutral, or which may keep the average tax rates constant. Such a reform generally improves efficiency under reasonable conditions but not necessarily if the average tax rate is calculated on taxable incomes or if revenue-neutrality refers to aggregate tax payments only. In most cases, an efficiency-improving reform probably increases inequality unless the marginal rate reduction greatly affects low-income taxpayers. So in some cases, there might be a utilitarian case for increasing, rather than reducing the marginal tax rate.