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A Positive Theory of Tax Reform

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  • Ethan Ilzetzki

    (Department of Economics, London School of Economics
    Centre for Macroeconomics (CFM))

Abstract

The political impediments to reform and the forces allowing its success are studied in a model where the tax base and statutory rate are separate instruments of tax policy. The model predicts that big bang reforms - large changes in the tax code - may be easier to enact than marginal reforms. Preferences over the tax base face a tipping point where even the beneficiaries from tax exemptions support re-form. At such a "reform moment", tax reform is Pareto improving. Politically feasible tax reform occurs when fiscal needs are large, but may nonetheless involve reductions in marginal tax rates. There is strategic complementary in lobbying for tax exemptions, resulting in multiple equilibria. Evidence from tax-base changes in a panel of OECD countries supports a number of the main predictions.

Suggested Citation

  • Ethan Ilzetzki, 2015. "A Positive Theory of Tax Reform," Discussion Papers 1526, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:1526
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    Cited by:

    1. Felix J. Bierbrauer & Pierre C. Boyer & Andreas Peichl, 2021. "Politically Feasible Reforms of Nonlinear Tax Systems," American Economic Review, American Economic Association, vol. 111(1), pages 153-191, January.

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    More about this item

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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