Some Economic Implications of the 1986 Tax Reform for the United States Economy

The 1986 tax reform represented a major revamping of the United States tax code. It reflected years of ideological and technical debate; and was considered to offer the most efficient tax structure feasible, given the political constraints facing the legislature at that time. However, even before its implementation (which is still under way), it became clear that the changes introduced into the tax structure were not locationally neutral. We here examine two hitherto unexplored dimensions which have a direct bearing on the inter-state equity question. The economic and locational factors associated with the "propensity to itemize" are explored, and then related to the degree to which previously deductible categories remained so after the reform. When these factors are considered, several unexpected results emerge which call into question several canons of the convential wisdom in this area.