Key Issues > Tax Reform
tax icon, source: GAO

Tax Reform

Taxes are necessary to fund services provided by the government. Beyond raising revenue, the federal tax system has profound effects on economic performance, business decisions, and individual taxpayers.

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Dissatisfaction with our current federal tax system has fueled a debate about fundamental tax reform due to concerns about the current federal tax system’s economic inefficiency, unfairness, and complexity. In addition, tax policy, including tax expenditures, can be part of efforts to address the nation’s large long-term fiscal imbalance. The current tax system is widely viewed as complex, thereby reducing the ability of individuals to understand and comply with tax laws. To the extent that a tax system is not simple and efficient, it imposes costs on taxpayers beyond the payments they make to the U.S. Treasury. Further, the tax system’s integrity and fairness is threatened if honest taxpayers believe that significant numbers of individuals and businesses are not paying their fair share of taxes.

Tax reform requires grappling with difficult issues. One is the amount of revenue the federal tax system should raise. The imbalance between revenue and spending will mean increasingly large and ultimately unsustainable federal deficits and debt. Tax policy needs to be part of a multipronged approach as policymakers assess how to alleviate the fiscal pressures.

Another issue is whether to change the tax base. The debate about fundamental tax reform is partly about switching from an income tax base to a national consumption tax. One type is a value-added tax, widely used around the world.

Another part of the tax reform debate is about reforming the current income tax by broadening its base and lowering rates.A broad tax base with lower rates can benefit economic efficiency but would require minimizing special tax preferences for specific types of investments and activities. The criteria typically used to evaluate tax policy provisions and to compare tax reform proposals—fairness, efficiency, simplicity, transparency, and administrability—often conflict with each other, requiring trade-offs.

Tax expenditures can help further federal goals through the tax system. They narrow the base and increase the tax rates needed to raise a given amount of revenue. The myriad of tax expenditures—reductions in a federal taxpayer’s tax liability that result from special credits, deductions, exemptions and exclusions from taxation, deferral of tax liability, and preferential tax rates—have various economic and social policy purposes, but their success in achieving these goals is too often not assessed. These provisions are also an important reason why the effective tax rates on individuals and corporations, which attempt to measure taxes paid as a proportion of economic income, can differ significantly from the statutory tax rates. See also Tax Expenditures for more information.

Looking for our recommendations? Click on any report to find each associated recommendation and its current implementation status.

Corporate Income Tax:

Effective Tax Rates Can Differ Significantly from the Statutory Rate
Published: May 30, 2013. Publicly Released: Jul 1, 2013.

Tax Expenditures:

Background and Evaluation Criteria and Questions
Published: Nov 29, 2012. Publicly Released: Jan 8, 2013.

Tax Policy:

The Research Tax Credit's Design and Administration Can Be Improved
Published: Nov 6, 2009. Publicly Released: Dec 8, 2009.

Value-Added Taxes:

Understanding the Tax Reform Debate:

Background, Criteria, and Questions
Published: Sep 1, 2005. Publicly Released: Sep 1, 2005.

More Reports

Tax Policy:

Differences in Definitions and Rules in the Tax Code
Published: Jul 18, 2014. Publicly Released: Jul 18, 2014.

Tax Policy:

Economic Benefits of Income Exclusion for U.S. Citizens Working Abroad Are Uncertain
Published: May 20, 2014. Publicly Released: May 20, 2014.

Puerto Rico:

Information on How Statehood Would Potentially Affect Selected Federal Programs and Revenue Sources
Published: Mar 4, 2014. Publicly Released: Mar 31, 2014.

Corporate Tax Expenditures:

Evaluations of Tax Deferrals and Graduated Tax Rates
Published: Sep 16, 2013. Publicly Released: Nov 6, 2013.

Corporate Tax Compliance:

IRS Should Determine Whether Its Streamlined Corporate Audit Process Is Meeting Its Goals
Published: Aug 22, 2013. Publicly Released: Sep 23, 2013.

Corporate Tax Expenditures:

Information on Estimated Revenue Losses and Related Federal Spending Programs
Published: Mar 18, 2013. Publicly Released: Apr 15, 2013.

Federal Tax Debts:

Factors for Considering a Proposal to Report Tax Debts to Credit Bureaus
Published: Sep 10, 2012. Publicly Released: Oct 10, 2012.

International Taxation:

Information on Foreign-Owned but Essentially U.S.-Based Corporate Groups Is Limited
Published: Jul 16, 2012. Publicly Released: Aug 15, 2012.

Tax Policy:

Factors for Evaluating Expiring Tax Provisions
Published: Jun 8, 2012. Publicly Released: Jun 8, 2012.

Reporting Foreign Accounts to IRS:

Extent of Duplication Not Currently Known, but Requirements Can Be Clarified
Published: Feb 28, 2012. Publicly Released: Mar 29, 2012.
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