When political factors are taken into account, tax reform intended to be revenue
neutral is likely to increase tax revenues. Any reduction in the excess burden of the
tax system is likely to increase government revenues because the marginal political
cost of tax increases is reduced. Evidence from the 1986 tax reform in the United
States and the adoption of the value-added tax in many European countries, where
the reforms were claimed to be revenue neutral, is consistent with the hypothesis
that "revenue neutral" tax reform generates more government revenue.
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