An Economic Analysis of Income Tax Reforms

The main purpose of this book is to compare two polar approaches to personal income tax reform in terms of both equity and efficiency. The options compared are a consumption-base flat tax of the type proposed by Hall and Rubushka for the United States and a comprehensive income base with lower tax rates based on the principles suggested by Simons. These options are evaluated at both the theoretical and empirical level. The book debunks the widely held view that a shift to a consumption-base flat tax is superior in terms of economic efficiency to a move to a comprehensive income tax. Using Canada as an example, this study shows that, in a small open economy, a move to a personal income tax with a comprehensive base and across the board tax cuts in order to maintain revenue-neutrality will improve both equity and efficiency. Within the framework of a knowledge based economy, this option is found to be superior to a consumption-base flat tax.