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Criteria for Tax Reform

In this paper the major criteria that determine the economist's perspectives on tax reform are examined. The assumptions, the implications, and the interrelationships of equity, efficiency, simplicity, and effectiveness are considered, and the question is asked as to whether these criteria together constitute a theory of tax reform. Distinguishing between tax design, which largely abstracts from the practical considerations of political decisionmaking and public acceptance, and tax reform, which confronts these realities, it is concluded that economic criteria by themselves do not constitute a theory of tax reform. Tax reform, it is argued, is essentially concerned with structural changes in a tax system that are achievable in a given set of circumstances. Of necessity, economic criteria often have to be balanced against political judgments about the public acceptability of proposals. Of equal importance, it is shown that second-best choices are inevitable, even in the context of pure tax-design, simply because of the conflicts between the various criteria and the impossibility of meeting the informational requirements of optimal choices. It is also noted that, in the absence of a common denominator, trade-offs between different criteria remain essentially arbitrary.