In Part 1 of this exercise, TPC estimated the revenue and distributional effects of proposals that wouldeliminate almost all income tax expenditures to lower individual and corporate tax rates and maintain long-run revenue neutrality for the Federal tax system. The results of Part 1 showed that individual and corporate income tax rates could be substantially reduced while meeting the dual constraints of long-run revenue neutrality and maintaining the distributional consequences of the current tax system.

Part 2 of this exercise restores several tax expenditures and calculates the income tax rates necessary to maintain long-run revenue neutrality. This portion of the exercise illustrates a drawback of considering tax expenditures in isolation: that approach ignores interaction effects between tax expenditures.