CONCLUSION: THE TRADE-OFF BETWEEN EQUITY AND EFFICIENCY

Almost everyone agrees that equity and efficiency are the two most important goals of the tax system. But often, these two goals conflict. Many proposed changes in the tax laws increase efficiency While reducing equity or increase equity while reducing efficiency. People disagree about tax policy often because they attach different weights to these two goals.

The recent history of tax. policy shows how political leaders differ in their views on equity and efficiency. When Ronald Reagan was elected president in 1980, the marginal tax rate on the earnings of the richest Americans was 50 percent.

The pendulum of political debate swings both ways. When Bill Clinton ran for president in 1992, he argued that the rich were not paying their fair share of taxes. In other words, the low tax rates on the rich violated his view of vertical equity. In 1993, President Clinton signed into law a bill that raised the tax rates on the richest Americans to about 40 percent. When George W. Bush ran for president, he reprises many of Reagan’s themes, and as President he reversed part of the Clinton ta x increase, reducing the highest tax rate to 35 percent.

Economics alone cannot determine the best way to balance the goals of efficiency and equity. This issue involves political philosophy as well as economics. But economists do have an important role in the political debate over tax policy: They can shed light on the trade-offs that society faces and can help us avoid policies that sacrifice efficiency without any benefit in terms of equity .