Tax Reform Implications of the Risk of a U.S. Budget Catastrophe

Daniel Shaviro

New York University School of Law

September 1, 2011

NYU Law and Economics Research Paper No. 11-34

Despite the demographic causes of the long-term U.S. fiscal gap, only severe dysfunction in our political system, abetted by malfunctioning and discontinuously responsive global financial markets, could lead to a U.S. budget catastrophe. Unfortunately, the risk of disaster appears to be alarmingly high. The rising danger has implications both for income tax reform and for the possible adoption of new tax instruments.

For income tax reform, the main implication is that base-broadening should be undertaken without accompanying 1986-style tax rate reduction. The threat of a fiscal catastrophe also raises concern about otherwise desirable but potentially revenue-losing reforms, such as to the rules for corporate and international taxation.

A number of tax instruments not currently used in the U.S. might be appealing even if the reform that included them was revenue-neutral overall. These include a value-added tax (VAT), a carbon tax, and a financial activities tax (FAT), although in my view a financial transactions tax (FTT) would not have comparable merit. All of these instruments potentially gain appeal if they could be used to ease the political prospects for raising overall U.S. tax revenues, and thus for reducing the risk of a budgetary catastrophe.

Number of Pages in PDF File: 26

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Date posted: September 10, 2011 ; Last revised: October 5, 2011

Suggested Citation

Shaviro, Daniel, Tax Reform Implications of the Risk of a U.S. Budget Catastrophe (September 1, 2011). NYU Law and Economics Research Paper No. 11-34. Available at SSRN: http://ssrn.com/abstract=1924852 or http://dx.doi.org/10.2139/ssrn.1924852

Contact Information

Daniel Shaviro (Contact Author)
New York University School of Law ( email )
40 Washington Square South
Room 314-B
New York, NY 10012-1099
United States
212-998-6187 (Phone)
212-995-4341 (Fax)
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