It's the Outcomes, Not the Rules: Transitional Issues in the Process of Tax Reform

Abstract

When tax rules change, taxpayers may face an increased tax burden that they were not able to anticipate upon. This raises the normative question of transition regimes: should taxpayers be compensated for unexpected losses? Academic thought typically focuses on single-rule changes. But in processes of tax reform, many rules change at the same time. And usually, the overall package is a political compromise that offers general compensation such as tax rate reductions, while ignoring some losses and providing specific relief for others.A discussion of the major tax reform discussion in the US, a shift from income tax to consumption taxation, shows how the normative conclusions drawn from the “single rule”-based approach run into difficulties. The practical approach would no doubt be to evaluate the overall effects of such a reform, and see which remaining losses require specific measures.There is no objective way to distinguish between the single-rule case and the tax-reform case. The decision to present measures as a package is a political one though it can be subjected to tests of plausibility and proportionality.