TaxSolver: A methodology to realize optimal income tax reform

TL;DR

TaxSolver reframes income tax reform as a constrained optimization problem, solving for an optimal set of tax rates under explicit fiscal guarantees and policy objectives. By modeling the entire income tax code as a sum of simple, piecewise-linear tax rules within tax groups, it guarantees mathematical optimality within the defined constraints and enables rapid generation of reform proposals. The approach recovers existing systems when guarantees are tight and demonstrates multiple reform use cases, including scale and complexity comparable to real-world tax codes, while remaining open-source for broad adoption. This methodology offers a principled, transparent alternative to ad-hoc tinkering, potentially accelerating reform cycles and enabling policymakers to compare alternatives based on explicit goals and limitations.

Abstract

Across the globe there are growing calls to streamline and improve ever more complex income tax codes. Executing reform has proven difficult. Even when the desired outcomes are clear, the tools to design fitting reforms are lacking. To remedy this, we developed \texttt{TaxSolver}: a methodology to help policymakers realize optimal tax reform. \texttt{TaxSolver} allows policymakers to focus solely on what they aim to achieve with a reform -- like redistributing wealth, incentivizing labor market participation or reducing complexity -- and the guarantees within which reform is acceptable -- like limited fluctuations in taxpayer incomes or shocks to overall tax revenue. Given these goals and fiscal guarantees, \texttt{TaxSolver} finds the optimal set of tax rules that satisfies all the criteria or shows that the set of demands are not mathematically feasible. We illustrate \texttt{TaxSolver} by reforming various simulated examples of tax codes, including some that reflect the complexity and size of a real-world tax system.

Figures (14)

• Figure 1: Schematic illustration of the 'Coding' and 'Iteration' problem in typical tax reform processes. The Coding problem complicates initial reform, which subsequently goes through various subsequent iterations.
• Figure 2: Schematic illustration of the ideal tax reform process, where political debate occurs at the start of reform and is solely concerned with setting the goals and guarantees of a reform rather than attempting the reform process via manual tinkering and amendments.
• Figure 3: Illustration of two types of tax brackets. On the left, a 5‐bracket progressive tax (10%, 20%, 30%, 40%, 50%) at intervals of 25,000 EUR; on the right, a single flat 30% rate.
• Figure 4: Example illustration of three types of benefits. On the left a group-dependent, universal benefit. In the middle, a childcare benefit that increases with the number of children. On the right, an income-dependent, group-dependent benefit.
• Figure 5: Example illustration of two deductibles. On the left is an input-reducing deductible that decreases the amount of taxable income by some amount $D$, in effect shifting each bracket by that amount. On the right, a tax credit equal to $D$ that nullifies the Taxes paid (EUR) on the first $D$ of income.