The Kemp Commission and the Future of Tax Reform

In this report, William G. Gale examines the Kemp Commission’s proposals and related them to several issues in the debate over fundamental tax reform. The first section describes what the report did and did not do. The second section analyzes the major recommendations one at a time. The third section analyzes the recommendations as a package. Assuming that the personal exemption levels the commission had in mind are roughly as large as those in current Republican tax proposals, adopting the commission’s proposals would require an estimated tax rate of about 27.5 percent to achieve revenue neutrality. If the tax rate were set at 20 percent, the proposals would raise the first-year deficit by $100 billion to $150 billion or more, even if there were very large behavioral responses. The fourth section evaluates the effects of the commission’s proposals on simplicity, equity, and growth. The fifth section raises two issues concerning the business tax, a critical feature of tax reform that has received little analysis to date. The next section discusses some “myths” of tax reform. The final section is a short conclusion.