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The Tax Reform Act of 1986: Comment on the 25th Anniversary

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  • Martin S. Feldstein

Abstract

The Tax Reform Act of 1986 was a powerful pro-growth force for the American economy. Equally important, as we look back on it after 25 years, we also see that it taught us two important lessons. First, it showed that politicians with very different political philosophies on the right and on the left could agree on a major program of tax rate reduction and tax reform. Second, it showed that the amount of taxable income is very sensitive to marginal tax rates. More specifically, the evidence based on the 1986 tax rate reductions shows that the response of taxpayers to reductions in marginal tax rates offsets a substantial portion of the revenue that would otherwise be lost. This implies that combining a broadening of the tax base that raises revenue equal to 10 percent of existing personal income tax revenue with a 10 percent across the board cut in all marginal tax rates would raise revenue equal to about four percent of existing tax revenue. With personal income tax revenue in 2011 of about $1 trillion, that four percent increase in net revenue would be $40 billion at the current level of taxable income or more than $500 billion over the next ten years.

Suggested Citation

  • Martin S. Feldstein, 2011. "The Tax Reform Act of 1986: Comment on the 25th Anniversary," NBER Working Papers 17531, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:17531
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    Cited by:

    1. Picchio, Matteo & Valletta, Giacomo, 2015. "Welfare Evaluation of the 1986 Tax Reform for Married Couples in the United States," IZA Discussion Papers 9378, Institute for the Study of Labor (IZA).
    2. Sanz Labrador, Ismael & Sanz-Sanz, José Félix, 2013. "Política fiscal y crecimiento económico: consideraciones microeconómicas y relaciones macroeconómicas," Macroeconomía del Desarrollo 134, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).

    More about this item

    JEL classification:

    • H0 - Public Economics - - General
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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