Tax Reform on the Allocation of Resources

a proposal for fundamental tax reform. The changes in investment incentives were designed to enhance fairness and economic growth. The Treasury Department's plan took large steps toward denning the tax base as economic income, and taxing that base at lower rates. Compared to current law, it was argued that the proposed code would tax more uniformly the returns from alternative assets, sectors, and industries. This more even-handed treatment would produce incentives for a superior mix of investment, which would in turn increase national output. A subsequent proposal by the president and legislation passed by the House of Representatives changed the specific features of tax reform, but they were motivated by the same general principles.1 During the continuing debate on fundamental tax reform, several issues have been raised with respect to the treatment of capital income. First, it has been asked whether the rate reduction is enough to offset the more comprehensive base for the tax on corporate income. Highe