Tax reform is more complex, as it involves tax rate cuts as
well as base-broadening changes. There is a theoretical
presumption that such changes
should raise the overall size of
the economy in the long-term,
though the effect and magnitude
of the impact are subject to
considerable uncertainty. One
fact that often escapes unnoticed
is that broadening the tax base
by reducing or eliminating tax expenditures raises the
effective tax rate that people and firms face and hence
will operate, in that regard, in a direction opposite to rate
cuts. But base-broadening has the additional benefit of
reallocating resources from sectors that are currently
tax-preferred to sectors that have the highest economic
(pre-tax) return, which should raise the overall size of the
economy.