Background
The Tax Reform Act (TRA), enacted in 1986, significantly overhauled the United States federal tax system. Its primary objectives were to simplify the tax code, increase fairness by broadening the tax base, and eliminate many tax shelters and preferences that were previously available. This legislation was considered one of the most comprehensive tax reform efforts in U.S. history.
Historical Context
The 1980s saw a growing concern about the complexity and perceived unfairness of the U.S. tax system. Tax shelters and numerous loopholes not only made the system opaque but also allowed high-income earners and corporations to exploit these benefits disproportionately. This inequity fueled a demand for drastic reform. Spearheaded by President Ronald Reagan, the TRA was signed into law on October 22, 1986.
Definitions and Concepts
- Tax Base: The total value of assets or income that are subject to taxation by a regulatory authority.
- Tax Shelters: Financial arrangements made to reduce taxable income and, therefore, tax liability.
Major Analytical Frameworks
Classical Economics
While the TRA was enacted much later than when classical economics was developed, its inclination towards simplification resonates with classical economists’ emphasis on market transparency and efficiency.
Neoclassical Economics
TRA shares several principles with neoclassical economic thought, notably the ideas of efficiency and market equilibrium. By broadening the tax base and eliminating shelters, it aimed to remove distortions in the market.
Keynesian Economic
TRA is less aligned with Keynesian economics, which typically emphasizes the role of government intervention in stabilizing the economy. However, the simplification of tax codes can be viewed as a measure to incentivize investment and consumption.
Marxian Economics
Marxian economists might critique the TRA for still inherently favoring the capitalist class, despite its objective of broadening the tax base. They may argue that more significant reforms are necessary to redress economic inequalities.
Institutional Economics
Institutional economists would be interested in the TRA for how it impacts various institutions and governance structures and modifies the behavior of firms and households by eliminating tax shelters and preferences.
Behavioral Economics
Behavioral economists could analyze the impact of the TRA on public perception of fairness and how these changes might influence taxpayers’ compliance and overall economic behavior.
Post-Keynesian Economics
Post-Keynesians might focus on the distributional impacts of the TRA, analyzing whether the changes helped to reduce income inequality or exacerbated it by shifting tax burdens.
Austrian Economics
Austrian economists would likely praise the reduction in tax rates and simplification efforts, emphasizing how these changes reduce government intervention and lead to a more market-based approach.
Development Economics
From a development economics perspective, lessons from the TRA could be applied to tax reforms in developing countries aiming for more efficient and fair tax systems.
Monetarism
Monetarists would look at the TRA in the context of its impact on federal revenue and fiscal policy, focusing on long-term impacts of the simplified tax code on inflation and economic growth.
Comparative Analysis
Comparatively, the Tax Reform Act of 1986 shares similarities with other tax reforms in various countries which aim to broaden the tax base and eliminate loopholes. It stands out, however, for the scale of reform and the bipartisan effort involved in its enactment.
Case Studies
To better understand the impact of the TRA, various industries and income groups before and after its implementation can be studied to analyze changes in tax liability, investment behavior, and income distribution.
Suggested Books for Further Studies
- “Showdown at Gucci Gulch” by Alan Murray and Jeffrey Birnbaum
- “The Tax and Legal Playbook” by Mark J. Kohler
- “Taxing Ourselves: A Citizen’s Guide to the Debate over Taxes” by Joel Slemrod and Jon Bakija
Related Terms with Definitions
- Income Tax: A tax that governments impose on income generated by businesses and individuals within their jurisdiction.
- Tax Code: The legal document and regulations governing how taxes are collected, managed, and enforced.
- Fiscal Policy: Government policies used to influence the economy through taxation and government spending.
