Learning from the 1986 Tax Reform Act
April 27, 2011
The 1986 Tax Reform Act (TRA86) was designed to improve three aspects of the tax code: efficiency, equity and simplicity. TRA86 accomplished all three goals in some measure by reducing the standard rates, increasing the standard deduction, and ending various tax expenditures that distributed resources to less efficient production purposes that sometimes served as the proverbial tax haven. But Congress has since narrowed the tax base and raised income tax rates, say Jason Fichtner, a senior research fellow at the Mercatus Center, and Jacob Feldman, a professor at Rutgers, The State University of New Jersey.
Fichtner and Feldman examine TRA86 goals of efficiency, equity and simplicity, to find the lasting successes and failures. Now, 25 years later, the federal tax code is again in dire need of reform.
- Successful tax reform must be based on the lessons of the Tax Reform Act of 1986, both its accomplishments and failures.
- Against an array of special-interest groups, bipartisan reform occurred that promoted greater efficiency, equity and simplicity in the tax code.
- The problem was that TRA86 did not tear down the largest tax expenditures that have since continued to grow.
- Even those tax expenditures that are considered to be politically untouchable must be on the table if the tax code is to promote strong and stable economic growth.
- Additionally, it might be necessary to create institutional reforms to prevent future tax expenditures from being added.
Failure to learn the lessons of TRA86 will only doom future reform efforts, say Fichtner and Feldman.
Source: Jason Fichtner and Jacob Feldman, "What Policy Makers Need to Learn to Avoid the Mistakes of the Past," Mercatus Center, April 2011.
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