Economic Efficiency in Recent Tax Reform History: Policy Reversals or Consistent Improvements?

25 Pages Posted: 12 Apr 2004 Last revised: 8 Aug 2010

See all articles by Don Fullerton

Don Fullerton

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

James B. Mackie III

U.S. Department of the Treasury, Office of Tax Analysis (OTA)

Date Written: May 1988

Abstract

The Economic Recovery Tax Act of 1981 reduced personal marginal tax rates and provided significant business tax breaks. Subsequent changes through 1985 cut back on business allowances. The Tax Reform Act of 1986 reduced marginal rates again, but added significantly to business taxes. Was there any unifying theme to these tax changes, or do they represent frequent changes in course for tax policy? This paper uses a general equilibrium model capable of second- best analysis to investigate the net effects on efficiency of each of these changes in capital income taxation. Under the new view that dividend taxes are unimportant investment disincentives, there is no set of other parameters in the model for which these changes generate improvements in efficiency. Under the old view that dividend taxes are important, however, these changes all increase efficiency for a wide range of values for other parameters in the model.

Suggested Citation

Fullerton, Don and Mackie, James B., Economic Efficiency in Recent Tax Reform History: Policy Reversals or Consistent Improvements? (May 1988). NBER Working Paper No. w2593. Available at SSRN: https://ssrn.com/abstract=428342

Don Fullerton (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 244-3621 (Phone)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

James B. Mackie

U.S. Department of the Treasury, Office of Tax Analysis (OTA) ( email )

1500 Pennsylvania Ave. NW
Washington, DC 20220
United States
(202) 622-1326 (Phone)

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