Do Taxes Matter? The Impact of the Tax Reform Act of 1986.

• Author: Snow, Sandra L.

As a result of studies commissioned by the Office of Tax Policy Research at the University of Michigan, this volume consists of nine original contributions by economists presented at a conference there in November 1989 plus an introductory, overview chapter by the editor. These conference proceedings, in which each chapter is accompanied by formal comments as well as a summary of the following general discussion, represent the first systematic examination of the economic effects of the Tax Reform Act of 1986 (TRA86), the most significant change in the U.S. income tax since it was converted into a broad-based tax during World War II. Signed by then President Ronald Reagan on October 22, 1986, TRA86 generally lowered statutory tax rates and attempted to recover that lost revenue by broadening the base to reflect a more accurate definition of income. Specifically, the revenue-neutral TRA86 shifted approximately seven percent of the tax burden from households to business. For the personal income tax, revisions included a significant increase in the standard deduction and personal exemption, a reduction in the number of tax brackets and marginal tax rates, the most dramatic being the reduction in the top rate from 50 to 28 percent, and base broadening via full taxation of capital gains, elimination of the sales tax, two-earner and personal loan interest deductions and limitation of passive losses and the deductibility of IRA contributions. Similarly, changes in the corporate income tax consisted of a reduction in corporate tax rates from 46 percent in 1986 to 34 percent in 1988 coupled with base broadening in the form of the abolition of the 10 percent investment tax credit and slower depreciation schedules for equipment and business structures. Although designed to meet the mere objectives of preservation of the distribution of the tax burden across income groups and simplification of the tax system, TRA86 was widely predicted to result in significant adverse impacts on sectoral economic aggregates.

The accuracy of these predictions is addressed by the contributors to Chapters two through nine in this book with respect to investment, personal saving, corporate financial policy and organizational form, housing markets, foreign direct investment, charitable giving, state and local fiscal behavior, and foreign tax reform responses, respectively. Diverse analytical techniques, ranging from purely descriptive to time series regression are employed...