The May 1985 tax reform package issued by the Reagan administration included a proposal to assess a “windfall recapture tax” on owners of existing depreciable assets; this unique proposal was one of the most controversial elements of the recommended reforms. As the first attempt to apply the principle of compensation in tax reform, the windfall recapture tax presents a host of provocative theoretical questions regarding its efficiency and equity properties, and also raises many interesting questions regarding the practical design of such a tax. This article analyzes those questions and presents theoretical and numerical analyses of alternative design approaches.
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