Can Tax Reform Solve the “Fiscal Trilemma”?

Abstract

Are the goals we have for our tax system mutually incompatible? This is the question that we posed to a distinguished group of tax economists at a conference hosted by the Murphy Institute and the Department of Economics at Tulane University in October 2012. More specifically, we asked whether the US economy faced a ‘‘fiscal trilemma’’: Can the three goals of revenue adequacy, fairness, and promotion of economic growth all be achieved, or do we have to sacrifice one of these goals to meet the others? Many of the traditional debates in tax policy are encompassed within this trilemma framework. For example, must a progressive tax system that meets our revenue needs hamper economic growth? Do progrowth tax systems that generate needed revenues come at the expense of progressivity? Would a progressive income tax system that managed to encourage growth provide insufficient revenues? Is there an unresolvable tension between the traditional Haig-Simons notion of a ‘‘good’’ tax—a broad-based, low-rate income tax base with few if any exclusions or deductions—that emerges from a largely static view of the tax system and the more growth-oriented taxes (e.g., a personal consumption tax, a value-added tax, and a retail sales tax) that emerge from a dynamic analysis of taxes? The tensions between these three goals of tax policy—fairness, growth, and revenue adequacy—are not fully understood or quantified. Our conference brought together researchers working on these issues to explore recent