Why Didn't the Tax Reform Act of 1986 Raise Corporate Taxes?
In: Tax Policy and the Economy, Volume 6
The Tax Reform Act of 1986 was projected to raise corporate taxes by more than $120 billion over the 1986-1991 period. Actual federal corporate tax receipts in the last five years have fallen far short of these projections. This paper explores the factors that have contributed to this shortfall. The most important factor is lower-than-expected corporate profits. The underperformance of corporate profits can be attributed to three principal causes. First, the predicted rates of corporate profits when the 1986 Tax Reform Act was enacted were high by historical standards. The U.S. economy in the late 1980s did not experience total returns on corporate capital, the combined return to equity and debt investors, as high as the forecasts would have suggested. Second, corporate interest payments were significantly higher, as a share of corporate operating income or GNP, in the late 1980s than in the years leading up to the Tax Reform Act. This reduced the corporate tax base, and may in substantial part ultimately be attributable to the marginal incentive effects for debt and equity finance provided in the 1986 Tax Reform Act. Third, also quite likely in reaction to recent tax changes, the last few years have seen rapid growth in the income reported by Subchapter S corporations. This income is taxed under the individual income tax. The rise of S corporations has therefore contributed to the erosion of the corporate income tax.
(This abstract was borrowed from another version of this item.)
|This chapter was published in: ||This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number
10839.||Handle:|| RePEc:nbr:nberch:10839||Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alan J. Auerbach & James M. Poterba, 1987.
"Why Have Corporate Tax Revenues Declined?,"
in: Tax Policy and the Economy, Volume 1, pages 1-28
National Bureau of Economic Research, Inc.
- Alan J. Auerbach & James M. Poterba, 1987. "Why Have Corporate Tax Revenues Declined?," NBER Working Papers 2118, National Bureau of Economic Research, Inc.
- Alan J. Auerbach & James M. Poterba, 1986. "Why Have Corporate Tax Revenues Declined?," Working papers 435, Massachusetts Institute of Technology (MIT), Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberch:10839. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.