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 with final passage in the Senate on a 97–3 vote.
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. The principles embodied in the tax reform of 1986 did not last. Tax reform expert and current Yale University law professor Michael Graetz analyzed the tax code in 2007 and exclaimed the failure of TRA86, noting “The Tax Reform Act of 1986 has not proved a stable outcome: Congress has since narrowed the tax base and raised income tax rates.”1 Additionally, stability can be judged by the number of temporary provisions in the tax code. In contrast to the 25 expiring expenditures in the 1985 tax code, 2010 had over 141 provisions that would expire within the next two years.2 Many of these provisions were renewed again with the passing of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
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.
1 Michael J. Graetz, “Tax Reform Unraveling,” Journal of Economic Perspectives, Vol. 21, No. 1, Winter 2007, pp. 86, accessed through EconLit (11/8/10)
2 Randall D. Weiss, Managing Director of Economic research at The Conference Board in New York City, “How Did the 1986 Tax Reform Act Attract So Much Support?” text from the Senate Committee on Finance, September 23, 2010, pg.8-9, accessed at http://finance.senate.gov/imo/media/doc/92310RWTEST1.pdf (2/25/11)