The Council of Economic Advisors yesterday released its Economic Report of the President.  Here is the Tax Policy Chapter (22 pages).  Here is the Introduction:

Societies face two basic questions with regard to tax policy. The first question concerns the amount of revenue that should be raised. That is, what is the appropriate level of taxation? The level of taxation ultimately reflects views about the appropriate size of government. If a society believes that the government should play a large role in the economy, then a high level of tax revenue is necessary. While taxes are necessary to finance the public sector, they have a considerable cost to the economy because they distort incentives and result in lost value of output to society. Without taxes, individuals would decide where to allocate resources depending on where those resources are most productive. Taxes give individuals an incentive to reduce their tax burden by avoiding activities that are taxed; as a result, decisions about working, saving, investing, and spending are influenced by tax considerations, resulting in the loss of output that would have created value for producers, consumers, and workers. The distortions created by taxes have important implications for economic growth and the well-being of Americans.

The second question about tax policy concerns how the tax burden should be distributed across different members of society and different types of activities. That is, what is the appropriate structure of taxation? Different tax structures impose different costs on the economy in terms of the distortions they create. A more efficient tax structure raises a given amount of revenue with less distortion. Different tax structures also give rise to different distributions of after-tax income, and some distributions of income may be viewed as more fair than others. A related issue is the timing of taxes. The use of government debt allows the tax burden to be spread across time, raising questions about how to tax different activities and individuals at different points in time.

The key points of this chapter are:

• The ratio of Federal taxation in the United States to gross domestic product (GDP) has fluctuated around an average value of 18.3 percent over the past 40 years; despite the President’s 2001 and 2003 tax relief, this ratio was 18.8 percent in 2007, above the 40-year-average. Under current law, revenues are predicted to grow faster than the economy in coming years, raising the level of taxation well above its historical average.
• Tax reductions in 2001 and 2003 have considerably lowered the tax burden on labor and capital income and reduced distortions to economic decisions. Making these tax cuts permanent can greatly improve long-term economic outcomes.
• In addition to contributing to growth, the tax cuts of 2003 also improved the efficiency of the tax structure primarily by reducing the double taxation of corporate income.
• The business tax structure in the United States still creates substantial distortions. To attract investment from abroad and compete more effectively in foreign markets, the United States must consider how best to address distortions created by the structure of business taxes, as other countries have done.