Tuesday, May 24, 2011

My new Tax Notes article on tax reform

Yesterday, Tax Notes published the article that I've mentioned here several times, "1986-Style Tax Reform: A Good Idea Whose Time Has Passed."

A link is available here.

The abstract goes something like this:

"The Tax Reform Act of 1986 combined base-broadening (such as the curtailment of tax expenditures) with tax rate reduction, in a manner that was designed to be revenue-neutral and distribution-neutral. It thereby established an influential model for tax reform that continues to be cited frequently today. This report argues, however, that while 1986-style tax reform was a good idea in its time, it is no longer appropriate in current circumstances, for three main reasons. First, if tax expenditures are properly viewed as spending through the tax code, then a revenue neutrality norm, in which the budgetary gain from their repeal ostensibly needs to be offset by rate cuts, is intellectually incoherent. Second, the long-term U.S. fiscal gap makes rate-cutting, in particular for individuals, potentially imprudent. Third, if one wants to address rising high-end income concentration in the U.S. since 1986, the option of raising, rather than reducing, the top marginal income tax rates may need to be squarely considered."


'G said...

It's a truly excellent, well thought-thru article. The 1986 reform has taken on mythical proportions, and it's skewing current discussion of ways to improve the tax system while combating the deficit gap.

You didn't say much, tho, about the gimmickry that was part of the '86 reform, such as the proliferating phase-outs that now make it almost impossible for folks to know what their marginal rates really are, the AMT, the use of arbitrary measurement "windows" etc. Many of the problems that now cry out for "reform" had their genesis in '86.

In any event, congratulations on an excellent, thought-provoking article.

Daniel Shaviro said...

Thanks. I tend to be forgiving of the 1986 gimmickry as the price of enactment. But you are right that some aspects of it were pretty awful ... As a JCT staffer at the time who worked on the AMT, I've always wondered if we could have gotten the principals to agree to AMT exemption amount indexing, so long as it started in Year 6 so it wouldn't affect the revenue estimates. This might actually have made a difference in the 1990s and thereafter.

michael a. livingston said...

OK, but weren't a lot of these things true before 1986 as well as after it? In other words, wasn't the left somewhat "had" by signing on to a purportedly "neutral" version of tax reform that was actually conservative in its essence? I believe there were some people who said so at the time.