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The Economic Effects of the Tax Reform Act of 1986
Abstract
The Tax Reform Act of 1986 constituted the most sweeping postwar change in the U.S. federal income tax. This paper considers what the Act accomplished and its implications for future tax policy. After a review of the Act itself, and why it happened, we consider the evidence of the Act's impact on economic activity and how this evidence squares with initial predictions. Where appropriate, we draw out how consideration of the impact of TRA86 has contributed to the development of the methodology of economic analysis. We conclude with an overall evaluation of the Act.
... Source: Johnson and Stark (1989 , Table 2). of accuracy. In Figure 5, we depict the timeline of events that led up to the enactment of TRA86 (Auerbach and Slemrod, 1997). The 1970s marked a period of economic turbulence with the oil crisis and high inflation, which led to increased scrutiny of the US's fragmented and complex tax system. ...
... To address these issues, the US Treasury recommended base-broadening measures, including repealing state and local tax deductions, introducing a deduction for 50 per cent of dividends paid, and indexing depreciation, capital gains, and interests (US Treasury, 1984). Auerbach and Slemrod (1997) provide a detailed account of the developments in the 1980s, the recommendations of the 1984 report of the US Treasury, and the simplification and base-broadening measures adopted under TRA86. We draw on Auerbach and Slemrod (1997) in our assessment. ...
... Auerbach and Slemrod (1997) provide a detailed account of the developments in the 1980s, the recommendations of the 1984 report of the US Treasury, and the simplification and base-broadening measures adopted under TRA86. We draw on Auerbach and Slemrod (1997) in our assessment. ...
This paper examines some drivers behind substantial changes in tax policy in recent decades. Using existing theories and our definition of ‘beneficial major tax reforms’, we discuss three case studies: the US in the 1980s, the UK in the 1980s, and the UK’s failed ‘mini-budget’ of 2022. Our analysis reveals that the US’s TRA86 has, to some degree, improved efficiency, while the UK reforms may have exacerbated inequality with ambiguous effects on efficiency. Finally, we outline the potential for future reforms and conclude that political conditions are more likely to instigate major change than economic motivations.
... Several extensions of Harberger's closed economy model have emerged by allowing product differentiation and several market imperfections. However, Gravelle and Smetters (2006), Auerbach and Slemrod (1997) etc. criticize these closed economy models, mostly for their assumptions of fixed supply of capital and labour and complete mobility of factors of production. Dimond and Mirrlees (1971) employed an open economy model in which the capital is mobile and the price of capital is fixed at the world rate of return. ...
... However, Dwenger, Rattenhuber, and Steiner (2019) use industry-and regional-level wage data from Germany during 1998-2006 and find that a 1 Euro decrease in the corporate tax leads to an increase in the corporate wage bill by 0.19 to 0.29 Euro. Using industry-level data for the US during 1982, 1992, and 1997, Liu and Altshuler (2013 show that labour bears 40 to 80% of the corporate tax burden. ...
The purpose of this paper is to examine the incidence of corporate tax on capital and labour in Indian manufacturing sector. The paper employs ‘Seemingly Unrelated Regression Method’ with add-up restriction based on the work of Desai, Foley and Hines (2007). The study shows that, for the manufacturing sector in India for the period 2005-19, the corporate tax has a significant adverse impact on both wages paid to employees and profit after tax. Capital owners bear 96.3% of the tax burden and labours bear only 3.7%. The adverse effect on wages is slightly higher in public firms than in private firms. The relative tax burdens of labour and capital remained the same in the pre-2008 global economic crisis and post-crisis periods. The impact on both wages and profits increase with age and size of firms but decrease with leverage. These results will be useful to policymakers and other stakeholders to take appropriate strategies to design the corporate tax policy such that it is more redistributive, and not a burden for labour in manufacturing firms in India. The paper contributes to the scant empirical literature on corporate tax incidence.
... 10 S-corporation ling status became more attractive following TRA86, which reduced the top personal tax rate below the corporate tax rate (Slemrod, 1996;Auerbach and Slemrod, 1997). Since then, the incentives to le as an S-corporation or a C-corporation have remained similar (Smith et al., 2017). ...
... 13 As we already discussed, TRA86 brought the personal top marginal income tax rate below the corporate rate, thus providing incentives to move income from the corporate to the personal income tax base (Auerbach and Slemrod, 1997). TRA86 also raised tax rates on capital gains by including all realized capital gains in taxable income (Slemrod, 1996). ...
... Table 2 provides analysis that show how reforms in taxation can pave the way to stable fiscal structure through expansion of the tax base and use of less distortive taxes like the sale taxes. These findings are in harmony with Auerbach and Slemrod (1997) who state that reforms on the revenue sources enhance certainty and certainty of governmental revenues so that governments can fulfill their functions without drastic borrowing. Therefore, any economies with a clearly spread and efficient base of tax are least likely to encounter extensive fiscal deficits that cause volatility in the financial sector (McKinley, 2003). ...
This paper aims at analyzing the effect of taxes on economic growth, particularly the cross-sectional impact of changes in fiscal policy, financial development and market openness. In this context, the study explores the effects of changes in taxes for a long period of time in order to determine how such changes affect certain economic parameters including GDP growth, income distribution and the markets. Based on theoretical and empirical literature, this paper reveals that tax reforms offer an important tool for private investment, sound fiscal revenue base through the predictable revenue flow, and improved competitiveness by eradicating tax distortions. Overall, they would help the authorities to design well-targeted, broad and annual-based tax reforms that could lead to improved market conditions and macroeconomic stability that could enhance the growth of the economy among other positive effects. Keywords: Tax reforms, economic growth, fiscal policies
... Keywords: inequality, mobility, racial gaps, geographic disparities The U.S. tax and transfer systems have changed fundamentally over the past five decades, resulting in lower effective tax rates at both the top and bottom of the income distributions as well as huge new outlays on social insurance and safety net programs (Auerbach and Slemrod 1997;Grogger and Karoly 2005;Piketty and Saez 2007;Moffitt and Ziliak 2019). Whether u. s . ...
... Representative Camp's recent proposal would also qualify, but of course it has not been enacted. Auerbach and Slemrod (1997) address numerous features of TRA on economic growth and its components. They suggest that, although there may have been substantial impacts on the timing and composition of economic activity-for example, a reduction in tax sheltering on wages (capital income) induced by EGTRRA and JGTRRA. ...
... changes in family structure with the share of non-marital births rising from 15 out of every 100 live births to nearly 40 (Cancian and Reed, 2009), a radical redirection of cash and near-cash safety net programmes from out-of-work to in-work support (Blank, 2002;Moffitt, 2003;Bitler and Hoynes, 2016;Hardy, Smeeding and Ziliak, 2018), and a move away from a highly progressive federal income tax with steep marginal tax rates to one with fewer and lower rates (Auerbach and Slemrod, 1997;Piketty and Saez, 2007). These public policy changes shifted more idiosyncratic and business-cycle risk on to families, and have negative welfare consequences if they fall predominantly on those who face liquidity constraints and are less able smooth income shocks (Kniesner and Ziliak, 2002;Blundell, Pistaferri and Preston, 2008;Gottschalk and Moffitt, 2009;Guvenen and Smith, 2014). ...
We examine trends in household disposable income inequality and potential mechanisms shaping inequality through changes to work, wages, earnings, marriage, and the tax and transfer system in the United States over the nearly five‐decade period from 1975 to 2022. Overall after‐tax and transfer income inequality increased more than 25 per cent since the mid‐1970s, and by as much as 50 per cent when comparing the 90 th and 10 th percentiles. While there has been substantial upgrading in formal education credentials among both men and women – an inequality‐reducing development – those with fewer credentials have increasingly been less likely to work and marry, each of which could result in higher inequality. The latter effects are exacerbated by those selecting into marriage and cohabitation being more likely to partner with those holding similar educational credentials and earning power. Moreover, the decline in work among the less skilled coincided with the transformation of the safety net to rewarding work. These demographic and policy changes have resulted in a pulling apart of the US income distribution.
... In Online Appendix C we address the impact of such potential mislabeling on our results. The source for this mislabeling could be partly related to the 1986 major tax reform (Feldstein 1995;Auerbach & Slemrod 1997), which may have led to changes in the distribution of income between labor and capital among top earners (Slemrod 1995;Smith et al. 2019). For example, income that was previously recorded as corporate income and earned in the form of dividends, that is, capital income, could be recorded after 1986 as labor income (if S-corporation income is passed through to personal business income). ...
Homoploutia describes the situation in which the same people are rich in the space of capital and labor income. We combine survey and administrative data to document the evolution of homoploutia in the United States since 1950. In 1950, 10 percent of top decile capital‐income earners were also in the top decile of labor income. Today, this indicator is 30 percent. This makes the traditional division to capitalists and laborers less relevant today. We find that the increase in homoploutia accounts for 20 percent of the increase in interpersonal income inequality since 1986.
... One of the challenges with studies that examine the effects of major tax reform is that multiple aspects of the tax code change simultaneously (Auerbach and Slemrod 1997). The TCJA is the most far-reaching tax law change since the Tax Reform Act of 1986. ...
The Tax Cuts & Jobs Act of 2017 (TCJA) limited interest deductibility. Using a difference-in-differences design, we show that following the enactment of the new limitations, affected firms significantly decrease their leverage. Specifically, we find that relative to unaffected U.S. firms, affected firms decrease leverage by 7.6 percent of assets, corresponding to 84.8 billion for the treatment sample. These results are driven by decreases in long-term domestic debt and by declines in new issuances rather than debt repayment. Additional tests indicate other tax reform elements do not explain the results. We also find that firms not currently subject to limitations on interest but subject to future limitations decrease leverage by about half as much as firms currently subject to the limits. Overall, our findings document an economically significant effect of recent tax reform on firm behavior and advance understanding of how taxes affect capital structure.
JEL Classifications: H26; H71; H72.
... One of the main areas of research in public economics deals with the inefficiency costs from taxation and public spending (see for instance, Auerbach & Hines 2002;Auerbach & Slemrod 1997;Gravelle & Kotlikoff 1989;Salanié 2003, among many others). Our paper is related to this literature by studying how the tax and spending policies of the central government modify the gains from the fiscal exchange that local governments offer to their residents. ...
En este ensayo se analizan las condiciones económicas y políticas en las que la efectividad de la redistribución pública puede ser baja en una federación. En nuestra economía el gobierno central redistribuye el ingreso mientras que los gobiernos locales proveen bienes públicos que benefician, primordialmente, a individuos de bajo ingreso. Si el gasto público local disminuye como respuesta a la política de redistribución del gobierno central entonces esta política podría ser inefectiva en redistribuir el bienestar de la sociedad. En este ensayo analizamos este tema. Los principales resultados de este estudio, son: primero, si el partido en el gobierno local de alguna entidad representa una coalición de votantes con un ingreso laboral por debajo del ingreso promedio de la economía, y si la transferencia neta agregada de recursos derivada de la política redistributiva del gobierno central es negativa para los residentes de esta localidad, entonces el gasto publico decrece en esta entidad si es que el gobierno central implementa una política de redistribución del ingreso; segundo, si los gobiernos locales son controlados por partidos políticos que representan a votantes con una elevada utilidad marginal de ingreso y un ingreso laboral por debajo de la media nacional, entonces la redistribución pública induce a todos los gobiernos locales a reducir el gasto público local.
... A further popular explanation for this development are tax reforms, particularly the 1981 and 1986 Tax Reform Acts (Bargain et al. 2015;Feldstein 1995;Auerbach and Slemrod based on authors' calculations using data from the WID Database (see Section 2 for details). The income concept is pre-tax fiscal income, excluding capital gains 1997; Hausman and Poterba 1987). ...
This paper studies the sensitivity of long-run trends in top income shares to differences in top-share measures. While the standard measure fixes a share of the population, we define alternatives that allow variation in both incomes and size of the top group based on defining absolute income thresholds. In an application to United States data, we find that top income share trends over the past century vary somewhat depending on the measure used. Allowing top groups to increase in size after 1980 along with overall economic growth results in a larger increase of top income shares. The historical drops before WWII are sensitive to the choice of income deflator: using GDP inflates interwar top income shares but using CPI deflates them. Altogether, these results recommend using complementary approaches to defining top income groups when measuring long-term top income share trends.
... Meanwhile in the neoclassical model, taxation has an impact on economic growth in short-run (Bleaney et al., 2001). In this logic, further researches demonstrate that cross-country studies generally find very small long-term effects of taxes on growth among developed countries and this is partially explained from the fact that their political economics vary (Auerbach et al., 1997). ...
... For instance, President Reagan's tax reform in 1986 was based on the implementation of the supply side tax policy achieved through cutting tax rates, eliminating tax shelters and broadening the tax base. This tax reform resulted in minimising the tax burden on investment and simplifying tax legislation that reflect implementation of supply side tax policy (Auerbach & Slemrod, 1997). Thereafter, the International Monetary Fund (IMF) and the OECD sought the implementation of this kind of tax policy to attract FDI instead of employing tax incentives (OECD, 2010a, p. 7), which have a number of shortcomings as discussed previously. ...
Many developing countries commonly use tax incentives as a key instrument for attracting foreign direct investment (FDI). Empirical studies have identified a causal relationship between FDI and a number of determinants including tax incentives, because they lower multinational enterprises' (MNEs) tax burden and consequently maximise their after-tax returns. Egypt is an example of a developing country that employed tax incentives through granting tax holidays to MNEs, in order to attract FDI, during the period 1974 to 2004. However, in 2005 the supply side tax policy was introduced through broadening the tax base and abolishing the bulk of tax incentives including tax exemptions. Nevertheless, in 2017 a new investment law was ratified which reintroduced tax incentives. This policy reversal raises a question about the relevance or otherwise of supply side tax policy in attracting FDI. To answer this question, we employ an econometric model to test the causal relationship between FDI and its determinants during the period 1975 to 2017. We assume that abolishing tax incentives would have a positive impact on inflow FDI. Using data from 1975 to 2017 for estimating the regression model, it is shown that there is a significant relationship between inflow FDI and implementation of supply side tax policy, while tax incentives have an insignificant effect on FDI. The result indicates that MNEs are looking for simplified tax provisions and lower tax rates, which are provided under supply side taxation. Further, the majority of MNEs are often taxed on their worldwide income in their residence countries, which indicates that they do not benefit from tax exemption. Accordingly, it is recommended that developing countries should consider broadening the income tax base and lowering income tax rates as an effective means of attracting FDI.
... This Act stipulated an increase of the effective maximum tax rate on capital gains from 20% to 28%, to be implemented in the following year. As a result, tax revenues from capital gains jumped by 90% before the act entered into force (Auerbach and Slemrod, 1997). Assessing the effect of this particular tax reform is flawed if fiscal foresight is not taken into account, and one may easily confuse directions of causality. ...
We propose a novel text-analytic approach for incorporating textual information into structural economic models and apply this to study the effects of tax news. We first develop a novel semi-supervised two-step topic model that automatically extracts specific information regarding future tax policy changes from text. We also propose an approach for transforming such textual information into an economically meaningful time series to be included in a structural econometric model as variable of interest or instrument. We apply our method to study the effects of fiscal foresight, in particular the informational content in speeches of the U.S. president about future tax reforms, and find that our semi-supervised topic model can successfully extract information about the direction of tax changes. The extracted information predicts (exogenous) future tax changes and contains signals that are not present in previously considered (narrative) measures of (exogenous) tax changes. We find that tax news triggers a significant yet delayed response in output.
... Many studies have been mainly conducted to analyze the industry data and government data. (These include studies of the Tax Reform Act [11][12][13][14], the Economic Recovery Tax Act [29][30][31], IFRS16 [15][16][17], the Securities Act [18], the America Invents Act [32,33], the American Recovery and Reinvestment Act [34,35], the American Jobs Creation Act [36,37], the Sherman Act [38], the Taxpayer Relief Act [39][40][41], the Glass-Steagall Act [42], the Gramm-Leach-Bliley Act [43], and the Omnibus Trade and Competitiveness Act [44].) The focus of these studies is on the significant impact of the promulgation or amendment of laws on society or related industries. ...
Taiwan’s Financial Supervisory Commission of the Executive Yuan promulgated the fully amended Certified Public Accountant Act in 2007, which directly led to significant changes in accounting law. From the perspective of the economic theory of law, this study investigates the amendment of the Certified Public Accountant Act resulting in an increase or decrease in the overall revenue and different revenue shares of accounting firms, and puts forward measures that should be taken by accounting firms and stakeholders. We focus on large accounting firms and divide the sample period into before and after 2008. This study uses the translog revenue function and revenue share functions of the public accounting industry, and based on the 1989–2017 Survey Report of Audit Firms in Taiwan, and we find that the amendment of the Certified Public Accountant Act has had a positive effect on overall revenue, increasing overall revenue and the overall management advisory services shares, and in reducing the overall accounting and auditing shares and tax services shares of large accounting firms. Additional analyses provide regulators with public policy implications and provide accounting firms with managerial information.
... To ensure social and economic prosperity, the Government uses taxation revenues to conduct its traditional operations, such as regulations on publicgoods, law and order protection, defense against external violence, trade and business regulation. Economic tax impacts include small impacts on the distribution of income and the quality of services, and massive impacts on capacity creation, jobs, prices and growth (Auerbach & Joel, 1997). According to the conventional theory, the sole purpose of taxation was to collect revenue for the Government. ...
This study explores Nigerian taxes in the years 1989-2019 on investment, social and economic well-being of people. Secondary data were collected from the research journals and bulletins released by the Chartered Institute of Taxation of Nigeria, the Central Bank of Nigeria, the National Bureau of Statistics and the Federal Ministry of Finance in Nigeria. Multiple regression analysis was used to analyze the data using the ordinary least square method. The accepted models are the revenue models, the gross domestic product and government expenditure. In line with our previous assertion, the findings of the analysis showed that the parameter estimates of corporate income tax and personal income tax emerge as negative signs, which means that taxation and expenditure have an inverse relationship. Calculated values show an increase in personal income tax would result in a decline in investment rates. Consequently, the outcome has demonstrated that taxation is adversely linked to the level of investment, the production of goods and services and is strongly linked to Nigerian government spending. Statistically, taxation is an important factor affecting Nigeria's taxes, GDP and government spending. It is, therefore, recommended that Nigerian Government should use tax to achieve its goal of improving its citizens ' social well-being, stimulate economic growth and development.
... 146 Ordinarily if tax reform is to be revenue-neutral, a lower rate for some means a higher rate for others. 147 Generally, democracies tend to have greater stability and flatter personal taxes, and tax rates are the same on business and employment income whereas in the Theocratic Republic state of Iran, there is a variation in the tax rate regarding employment and business income. Further, it shows that in the Theocratic Republic states the type of government and the comprehensiveness of the social service exchange are not as closely connected as in democratic states. ...
The power to tax is one of the most basic power to assure state revenues. This article attempts to investigate the interaction between tax and democracy, asserting that the two form an important basis for a fiscal, social contract between the state and its subjects. The hypothesis is that taxation is the mechanism for legally taking a part of one's wealth in return for freedoms/services and that compliance with taxation works best with representation. The article outlines the earliest emergence of democracy and taxation, specifically within New Zealand's historical landscape. It explores what drives tolerances towards taxation and an overview of taxation in undemocratic states.
... To ensure social and economic prosperity, the Government uses taxation revenues to conduct its traditional operations, such as regulations on publicgoods, law and order protection, defense against external violence, trade and business regulation. Economic tax impacts include small impacts on the distribution of income and the quality of services, and massive impacts on capacity creation, jobs, prices and growth (Auerbach & Joel, 1997). According to the conventional theory, the sole purpose of taxation was to collect revenue for the Government. ...
This study explores Nigerian taxes in the years 1989-2019 on investment, social and economic well-being of people. Secondary data were collected from the research journals and bulletins released by the Chartered Institute of Taxation of Nigeria, the Central Bank of Nigeria, the National Bureau of Statistics and the Federal Ministry of Finance in Nigeria. Multiple regression analysis was used to analyze the data using the ordinary least square method. The accepted models are the revenue models, the gross domestic product and government expenditure. In line with our previous assertion, the findings of the analysis showed that the parameter estimates of corporate income tax and personal income tax emerge as negative signs, which means that taxation and expenditure have an inverse relationship. Calculated values show an increase in personal income tax would result in a decline in investment rates. Consequently, the outcome has demonstrated that taxation is adversely linked to the level of investment, the production of goods and services and is strongly linked to Nigerian government spending. Statistically, taxation is an important factor affecting Nigeria's taxes, GDP and government spending. It is, therefore, recommended that Nigerian Government should use tax to achieve its goal of improving its citizens ' social well-being, stimulate economic growth and development.
... 4. Alstadsaeter, Kulm, and Larsen (2008) and Malchow-Moller, Bo Nielsen, and Skaksen (2011) Many other factors such as major-specific or national unemployment rates (Blom 2012;Bradley 2013;Blom, Cadena, and Keys 2015;Clark 2015) and the classroom composition of introductory college courses (Fischer 2016) can also affect college major choice. 6. See Poterba andHausman (1987), Feldstein (1995), and Auerbach and Slemrod (1997) for a detailed discussion of the 1986 Tax Reform Act (TRA86). 7. I also considered looking at the impact of other large tax reforms that occurred around the time of TRA86. ...
This article evaluates whether changes in relative earnings across majors due to a federal tax reform are likely to affect college major choice. I first estimate the change in expected after-tax lifetime income due to the 1986 Tax Reform Act for 47 majors. I find that the average major experienced an increase in expected after-tax lifetime income of 6.2 percent and that the standard deviation of major-specific expected lifetime income premia increased by 6.1 percent. I estimate the impact of the change in relative earnings on the distribution of completed college majors, finding no statistically significant change in the composition of majors following the reform. Consistent with the estimation, simulations reveal that at most 0.25 percent of males completed a different major in response to the reform.
... However, the effect of cultural distance on cross-border acquisition performance depends on the level of acquisition experience of the acquirer (Dikova and Sahib 2013). Furthermore, governments promote greenfield investments, thus the potential for receiving incentives such as preferential tax treatment, subsidies, etc. is higher for these projects (Albornoz, Corcos, and Kendall 2009;Oman 2000) and a lack of support programs for investors or high taxes are likely to have a lower impact on greenfield investments compared with acquisitions (Swenson 1994;Auerbach and Slemrod 1997;Mudambi 1998;Szanyi 2001;Demirbag, Tatoglu, and Glaister 2008;Becker and Fuest 2011). Greenfield investments are also a preferred option when MNEs operate in RandD intensive industries that can have an impact on lowering the barrier concerning limited access to new technologies (Bertrand et al. 2012). ...
Limiting factors of foreign direct investment are of great significance for managers, governments, and scholars as they directly influence the profitability of a foreign subsidiary and a parent multinational company. The aim of the paper is to identify FDI limiting factors of host country location choices among Polish enterprises and differences in the perception of the factors depending on the establishment mode choice, i.e. whether it is through greenfield investments or acquisitions. The paper presents results of a field surveyed carried out in 2012–2013 among Polish companies. The research results revealed that regardless of the establishment mode choice, investors from Poland perceived market-related limiting factors as significant. The empirical findings also proved that there were no significant differences in the perception of the importance of FDI limiting factors, between investors who undertook acquisitions and those who decided to make greenfield investments. However, single cases of differences were identified at the level of the policy framework-related factors.
... As the high-income taxpayers are attempting to evade high amounts of taxes, the resources spent on implementing the activities related to the tax evasion are not negligible. On the other side, the literature also provides strong evidence that the shadow economy creates a shelter for many unemployed (e.g. during the time of crises) and thus frees the government budget from expenditures in the form of social contributions, etc. Auerbach and Slemrod (1997) conclude that timing and other tax evasion behaviours are the behaviours most responsive to tax changes, while changes in real productive activities are actually the least responsive. These timings and other evasion behaviour types also likely explain that taxpayers change the timing, when they derive or evade income and "plan" their tax evasion based on various social, legal or fiscal circumstances. ...
The paper refers to important tax evasion consequences in the form of destabilization and countries’ fiscal development deteoriation. The main objective of the research is to analyse the selected determinants impact on short‑term fiscal imbalance expressed as primary balance with the emphasis on tax evasion. The object of the research is analysed using a panel regression model within four pre‑identified clusters during the period of 21 years. The results of the conducted analysis point out that the tax evasion has a significant effect primary balance. They also point out the differences of tax evasion impact, extent and timeing effect on primary balance between clusters. A future analysis with adjusted and modified investigated period, segmentation criteria in the cluster analysis or exogenous variables in the panel regression analysis could provide a different insight into this problem.
... Ultimately, the issue is a complicated legal decision as outlined by some advantages and disadvantages in Backman (2015). Auerbach and Slemrod (1997) note that financial innovation, that is, new accounting and reclassification, were major outcomes of the 1986 tax reform. ...
Estimates of tax reform’s impacts usually concentrate on macroeconomic impacts, but attention at the industry or sectoral level is often limited. Our study uses a computable general equilibrium (CGE) model to estimate the disaggregated impacts of the Tax Cuts and Jobs Act (TCJA) of 2018, which lowered personal and corporate tax rates. Focusing on agriculture, we use survey data to calculate how the TCJA would change the tax rates faced by farmers at the sector level. We use Internal Revenue Service data to calculate tax rates for all other producers. We then simulate the economy-wide and sectoral effects of TCJA. We find that the TCJA would cause a reduction in agricultural output as resources would be reallocated to other sectors. Using our survey data, we extend the CGE results to measure the impacts to farm households—from changes in on- and off-farm income. We find that most farm households would have income gains from tax reform. Our tax reform scenario highlights the fact that investment weighs heavily on model results. That is, firms that are attractive to domestic and foreign investment have gains in demand for their products, while other sectors, such as primary agriculture, experience decreases in production. A sensitivity analysis that reduces the attractiveness of the United States in foreign investment shows smaller impacts of TCJA, especially for macroeconomic variables.
Nigeria's tax framework, as defined by Section 24(f) of the Constitution, mandates that all citizens fulfill their tax obligations. This legal foundation empowers various government levels to collect taxes, including income taxes from individuals and corporations. However, the persistent issue of tax evasion remains a significant obstacle to revenue generation in Nigeria. This problem isn't confined to a specific region, as Edo State, too, grapples with income tax evasion, detrimentally impacting its revenues. Despite legislative and judicial efforts, tax evasion prevails. In response, the Edo State Government introduced the Edo Revenue Automate System (ERAS), a computerized solution aimed at streamlining individual income tax administration and curbing evasion. Concerning this, the study tends to adopt a doctrinal method of study in ascertaining the legal issues of adopting automated income tax in Edo State, drawing inspiration from the United States, where a well-established computerized income tax system operates under the backing of enacted laws. The study therefore found that there are incidences of tax evasion in Edo state, that though the adoption of an automated income tax system could aid in curtailing the incidence of tax evasion in the State, there are legal and socio-economic shortcomings that could hamper the Edo State automated income tax system. In this regard, this study recommends and concludes with proposals for enhancing the effectiveness of the computerized individual income tax system in Edo State. The study further emphasizes the need for a strong legal framework to support technology-driven tax systems and the importance of adopting best practices from countries like the United States to mitigate tax evasion.
Keywords: Automated, Legal, Income, Tax, Edo State, America
Almost half of all private employment in the United States is within businesses that do not pay corporate income tax. Instead, business income passes through to the owners’ individual income taxes. This pass-through share of employment has more than tripled since the early 1980s. Using comprehensive, confidential administrative data, this paper highlights five core findings underlying this growth: (1) the rise in pass-throughs is pervasive across industries and states; (2) the pass-through share converges unconditionally across both; (3) entrants’ organisational choices drive 60% of the rise; (4) shifts in firm and organisational dynamics following the 1986 Tax Reform Act show continued effects through the 2000s; (5) organisational forms exhibit high persistence with little life-cycle variation. Our study implies that tax or regulatory policy changes might take decades to manifest fully.
It is debated to what extent corporate taxation discourages capital formation, and the related empirical cross-country evidence is inconclusive. This paper provides new insights into this matter for a large sample of developed and developing countries. In the first step, national accounts data is used to calculate backward-looking effective corporate income tax rates (ECTR) for 77 countries during 1995–2018. In the second step, dynamic panel data regressions are used to estimate the effect of ECTR on aggregate corporate investment. The main findings of this exercise are that (i) statutory corporate income tax rates (SCTR), on average, are twice as high as ECTR, (ii) average ECTR has been relatively stable but show distinct dynamics across countries and (iii) no significant negative relationship exists between ECTR and investment. The latter finding is robust to different specifications and samples and when publicly available SCTR or forward-looking effective tax rate measures are used as alternative tax rate proxies.
This article provides an agnostic, historical review of taxation and economic growth. It critically evaluates how the relationship between the two has evolved throughout modern history. After an introduction that provides a general overview of the relationship between taxation and growth, the article first discusses the positive role of taxes in promoting economic development in the prewar and postwar periods of the 1940s. It then critically comments on Solow's neoclassical growth theory and explains the experience of stagflation faced by many advanced countries in the 1970s and its implications for tax theory. New growth theories that attribute an important role in economic growth to government policy in general and tax policy in particular are then discussed. This is followed by a rounded five-point assessment of the impact of taxes on growth. The article ends with a general conclusion.
This paper examines the relationship between tax avoidance and accounting comparability. We argue that aggressive tax behavior impairs the comparability of financial statements by altering the accounting function, which maps economic events into accounting data. Using raw and industry-adjusted effective tax rates to proxy tax avoidance, we find that firms with more aggressive tax avoidance strategies have substantially lower accounting comparability. The evidence also shows that the negative effect of tax avoidance on accounting comparability is driven by firms with aggressive tax planning strategies beyond the industry norm. Furthermore, using an alternative measure of accounting comparability as a function of pre-tax income, we continue to find evidence of the negative effect of tax avoidance behavior. Importantly, this provides evidence that the effect of aggressive tax planning is not limited to the reported tax expense, but affects the comparability of the overall financial reporting system. Our results contribute to the literature on the costs of tax avoidance and on the determinants of accounting comparability.
Chapter 3 discusses two issues. One is the distinction between first-best and second-best analyses. The other is the political economy of public sector theory, centered on the social welfare function and Arrow’s impossibility theorem. The social welfare function is the one indispensable political element in normative mainstream public sector models.
Chapter 15 explores the implications of asymmetric information for taxation, while subsequent chapters extend the analysis to transfer payments and other public expenditures. Topics include the limitations of lump-sum redistributions under asymmetric information, the limit to redistribution under a sales tax, Pareto-efficient taxation under self-selection constraints, optimal income taxation, and tax evasion.
How do policy paradigms change? This article demonstrates that changing social imaginaries about economic growth enabled paradigmatic changes in USA corporate tax policy in the 1980s. Based on archival sources, it reconstructs how policy makers switched from focused support for capital-intensive smoke-stack industries towards support for emerging high tech-sectors between two major tax-bills in 1981 and 1986. This switch was made possible by the emergence of what we call the Silicon Valley imaginary—the idea that sound economic policies stimulate the reallocation of society’s resources towards new economic fields. The emergence of this social imaginary resulted from political realignments and changing notions of economic growth and justice. The search for sources of future economic growth and societal coalitions led policy-makers to appropriate ideas about the promises of new industries.
Since the 1980s, many governments in the Western world have implemented radical income tax cuts which have become associated with soaring levels of inequality. The literature has focused on institutional accounts to explain these developments. However, institutions alone cannot account for the emergence of societal and political support necessary for radical change of this kind. Therefore, this paper explores the role of communication techniques directed at voters, interest groups and legislators to enable radical reform. Based on a content analysis of Congressional debates for the Reagan and Bush tax cuts, contextualised with archival documents from Presidential Libraries, this study shows the critical relevance of strategic acts of compromise to shore up legislative and voter support for radical tax cuts. It finds (a) that change actors have several different acts of strategic compromise (incorporation, compensation, and reconciliation) at their disposal which they use at different points in the legislative process. That (b) the most successful strategies consistently link the coordinative discourse (bargaining with interest groups behind closed doors) and communicative discourse (directed at the public and the minority congressional party). And that (c) change actors learn how to the use successful combinations of compromise over time and thereby enhance reform stability.
I propose a model of legislative bargaining among endogenous coalitions over multiple policy dimensions. I provide a characterization of (i) the partition of the legislature into coalitions, (ii) the policy reforms that coalitions propose (if any), and (iii) the policy outcome attained from these proposals. I show that—depending on the position of the status quo—either (1) the presence of coalitions does not affect the policy outcome and a median voter theorem holds, or (2) an alliance among legislators with extreme and opposite political views—i.e., a coalition of extremes—can successfully block reforms that would be feasible if legislator could not coalesce. Lastly, I show that the extent to which the existence of coalitions can increase the set of possible policy reforms is severely limited or null.
Long-run fiscal levels, or synonymously, fiscal targets, are usually assumed to be known to households inside the economy. This paper investigates the effects of unknown fiscal targets in an incomplete information, anticipated utility (IIAU) environment. Slowly increasing transfer payments cause households to suspect time-varying targets, and misperceptions impact both their expectation formation and decision making. Perceived targets enter the IIAU model as nonlinear state variables, introducing state-dependent fiscal multipliers. The short-run stimulus effects of Trump’s 2017 and Reagan’s 1981 Tax Cuts are comparable and modest. The long-run effects of Trump’s Tax Cuts worse off if transfers continue to increase.
This study examines the effect of the Tax Cuts & Jobs Act of 2017 (TCJA) on corporate defined benefit pension contributions. The TCJA decreases the corporate tax rate from 35 in 2017 to 21 percent in 2018, and thereafter. This change incentivizes firms to increase 2017 pension contributions to take advantage of tax deductions at a higher rate. Consistent with this incentive, we find firms increase defined benefit pension contributions by an average of 25 to 31 percent in 2017 compared to earlier years. We also find that taxpaying firms are the primary contributors. Further, taxpaying firms with high levels of pension‐related deferred tax assets contribute over three times as much as taxpaying firms with low levels of pension‐related deferred tax assets. We also find firms that increase in pension contributions in 2017 reduce 2018 contributions, consistent with intertemporal income shifting rather than a permanent change in pension funding strategy.
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The Tax Reform Act of 1986 was expected to cause an overall decline in business fixed investment and a shift in the composition of investment away from machinery and equipment, which previously had received an investment tax credit. Yet neither investment relative to GNP nor equipment investment relative to total investment declined during the period 1987-89. This paper's analysis of investment at the level of individual industries and assets helps reconcile the recent pattern of investment and the predicted effects of the Tax Reform Act. We find that the trend toward investment in equipment predated the Act, and that recent investment in equipment has fallen short of what would have been expected on the basis on nontax factors alone. Using a new technique to identify the impact of taxation on investment, we confirm the importance of tax policy using the cross-section pattern of equipment investment since 1986.
* Abstract - This paper analyzes the response of households to the provision in the Tax Reform Act of 1986 that phased out the deductibility of interest paid on consumer debt. The evidence suggests that the policy goals of the provision were frustrated because households shuffled their portfolios, substituting mortgage debt for con- sumer debt. High-income homeowners appear to have shuffled more of their debt and thus increased their share of the benefits of the mortgage interest deduction. One reason for this differ- ence in shuffling may be that high- income homeowners scored better on measures of financial sophistication, and better scores appear to predict greater shuffling. Policy options that would reduce the use of mortgage debt for nonhousing purchases are discussed.
The authors examine the aggregate and distributional effects of the Tax Reform Act of 1986 on equity values of publicly traded corporations. The results show that the effect of the act on the aggregate equity value of corporations was consistent with the present value of the projected added tax collection from the corporate sector. The cross-sectional variation in the magnitude and direction of the stock price response to the Tax Reform Act of 1986 was a function of both the direct and indirect consequences of the act on the firms' future cash flows. Copyright 1991 by University of Chicago Press.
Recent empirical work on captial gains implies that realizations are highly sensitive to marginal tax rates. Because they
are based on cross-section data, however, these estimates cannot distinguish between permanent responses to tax rate changes
and the timing of realizations to take advantage of the normal fluctuations in any individual's tax rates over time. The purpose
of this paper is to distinguish transitory from permanent tax effects by analyzing panel data for taxpayers. Controlling for
permanent and transitory income and other variables, the estimates suggest both transitory and permanent effects, although
the permanent tax rate effect is not significant in all cases.
To address the question of whether IRA5 contribute to capital formation, we use the IRS/University of Michigan taxpayer sample for income tax returns during 1980-84. By matching families across a five-year period, we can estimate the dynamic interactions of IRA purchases and other types of saving, correct for individual differences, and test whether IRA purchases are in part offset by other (net) asset sales. The "reshuffling" hypothesis implies that taxpayers who enroll in IRAs should, over time, experience a drop in net taxable interest and dividend income as their taxable assets (or new loans) are used to purchase IRAs. Conversely, the "new saving" view of IRAs implies that taxable interest and dividend income should be unaffected by IRA purchases. We find little or no evidence which favors the view that IRAs are funded by cashing out existing taxable assets. In fact, individuals who purchased IRAs in each year between 1982-84 increased their asset holdings by more than those who did not purchase IRAs. In one sense, our results strongly confirm the studies by Venti and Wise and Hubbard that IRA saving represents new saving. But shuffling could still occur, albeit on a secondary level: families who are accumulating both taxable assets and IRAs might have accumulated even more taxable assets had IRA5 not been available
This paper examines the source of changes in corporate tax revenues during the last twenty-five years. It finds that legislative changes explain less than half of the revenue decline during this period. Falling corporate profits have had a larger influence on revenue collections than a11 legislative changes taken together, a result that is often obscured in studies focusing solely on the average corporate tax rate. Changes in capital recovery provisions are the most important legislative factor influencing corporate tax revenues, especially in the last five years. The paper also considers the impact of the Tax Reform Act of 1986. The new law will increase the average tax rate on corporate profits by approximately 10 percent. By 1990, the average tax rate will equal its level in the late 1970s, although it will remain substantially below its level in the 1960s and the early 1970s.
This paper develops an overlapping generations general equilibrium growth model with an explicit characterization of the role of capital goods in the production process. The model is rich enough in structure to evaluate and measure simultaneously the different distortions associated with capital income taxation (across sectors, across assets and across time) yet simple enough to yield intuitive analytical results as well. The main result is that uniform capital income taxation is almost certainly suboptimal, theoretically, but that empirically, optimal deviations from uniform taxation are inconsequential. We also find that though the gains from a move to uniform taxation are not large in absolute magnitude these gains would be offset only by an overall rise in capital income tax rates of several percentage points. A separate contribution of the paper is the development of a technique for distinguishing intergenerational transfers from efficiency gains in analyzing the effects of policy changes on long-run welfare.
The construction of multifamily rental housing has declined substantially in the past few years and remains low. This paper investigates the rental housing market during the last 15 years or so to determine whether the Tax Reform Act of 1986 and, more generally, tax policy relating to rental housing are responsible for the current state of the rental housing market. Attention is focused on movements in rent indexes and multifamily construction in four metropolitan areas—Atlanta, Chicago, Dallas, and Oakland—for the period 1977 through 1990. The results suggest that rents are not sensitive to changes in tax policy; however, construction is sensitive. More generally, the analysis indicates that it is quite difficult to identify precisely the effects of tax policy on the rental housing market during the 1980s.
Between 1988 and 1993 the Belgian personal income tax system and the indirect tax system have been reformed to a considerable extent. We use microsimulation models to investigate the impact of the reform on the liability progression and the redistributive effect of the combined tax system. The redistributive effect of personal income taxes decreased, notwithstanding an increase in liability progression. For indirect taxes, both the liability regressivity and the reverse redistributive effect have been enhanced. We use recently developped statistical tests to gauge the significance of the observed changes.