Next Steps in Tax Reform

Abstract

The GOP tax reform, now adopted as the 2017 Tax Cuts and Jobs Act, was intended to cut business taxes to stimulate investment, lower some personal taxes, eliminate deductions and tax credits to help pay for the tax reductions, and move the U.S. toward a territorial tax system and reduce the shifting of profits abroad by U.S. companies. Some of these objectives have been achieved, but at the cost of perverse incentives and distributional effects, and the threat of a substantial contribution to the fiscal deficit. As a result, corrections are going to be required in future years. Many of the Act’s undesirable features are attributable to the inability of its drafters to come up with sufficient revenue to compensate for the tax reductions. A CO2 tax is explored, as perhaps the only measure that is consistent with the declared principles of the GOP leadership and likely to draw Democratic support, and large enough to make up for the Act’s revenue-losing provisions. We summarize the process that led to the Act and its major failures. Then, applying the MIT U.S. Regional Energy Policy (USREP) model, we show how, when the Act is opened up for repairs, a CO2 tax could help correct its flaws while serving environmental goals.