Lessons from the 1986 Tax Reform Act: What Policy Makers Need to Learn to Avoid the Mistakes of the Past

Abstract

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. The debate leading up to passage of TRA86 was contentious and, like today, tax reform was seen as being politically impossible. However, TRA86 achieved significant bipartisan support.

At the time, TRA86's passage seemed like a great success for tax reform. However, looking at the 2011 tax code, taxpayers would be hard pressed to find the aspects of efficiency, equity, and simplicity that were improved with passage of TRA86.

What happened over the past quarter of a century? How quickly did the reforms of TRA86 unravel and why? This paper examines the act's goals of efficiency, equity, and simplicity, to find the lasting successes and failures of TRA86. Now, 25 years later, the federal tax code is again in dire need of reform. The old saying that those who ignore history are doomed to repeat it also applies to tax reform. Those wishing to reform the tax system today would be wise to learn from the past.

Keywords: tax, tax reform, tax reform act of 1986, TRA86, budget, federal tax policy

JEL Classification: H2