Tax Shelters and Passive Losses after the Tax Reform Act of 1986

50 Pages Posted: 30 Jun 2000 Last revised: 1 Sep 2010

See all articles by Andrew A. Samwick

Andrew A. Samwick

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 1995

Abstract

The precipitous decline in tax sheltered investments after the Tax Reform Act of 1986 (TRA) is widely attributed to the passive loss rules. These rules disallowed losses from activities in which the taxpayer did not materially participate as a current deduction against all sources of income except for other passive activities. This paper demonstrates instead that the role of the passive loss limitations was secondary to that of other reforms enacted by TRA, most importantly the repeal of the investment tax credit and the long-term capital gain exclusion. These other reforms not only lowered after-tax rates of return on tax sheltered investments but also eliminated the positive correlation between the investor's marginal tax rate and the investment's after-tax rate of return. As a result, high income taxpayers ceased to be the natural clientele for legitimate tax shelters after TRA. The passive loss rules were more effective in curtailing the use of 'abusive' tax shelters; however, it is shown that a more narrowly focused restriction on seller financing of tax sheltered investments could have accomplished the same goal with much less scope for discouraging productive economic investments.

Suggested Citation

Samwick, Andrew A., Tax Shelters and Passive Losses after the Tax Reform Act of 1986 (July 1995). NBER Working Paper No. w5171. Available at SSRN: https://ssrn.com/abstract=225234

Andrew A. Samwick (Contact Author)

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States
603-646-2893 (Phone)
603-646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~samwick

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
37
Abstract Views
1,074
PlumX Metrics