Parallel Politics: Economic Policymaking in the United States and Japan

By Samuel Kernell | Go to book overview

The Surprising Enactment of Tax Reform in the United States

Allen Schick

NEAR THE END of his comprehensive study of the federal income tax published in 1985, political scientist John Witte reviewed several pending reforms, including one to set up a three-rate tax structure, and concluded: "There is nothing, absolutely nothing in the history or the . . . politics of the income tax that indicates that any of these schemes have the slightest hope of being enacted in the forms proposed."1 Barely one year after this prognosis appeared, Congress enacted the Tax Reform Act of 1986, arguably the most sweeping change in federal tax policy since the income tax was broadened during World War II. In what is probably a widely held view, journalists Jeffrey Birnbaum and Alan Murray characterized this law as a "legislative miracle that defied all the lessons of political science, logic, and history."2

In terms of the changes made in the tax laws and the loopholes it eliminated, the 1986 legislation certainly was extraordinary. The act (1) reduced individual income taxes from fourteen rates to three and lowered the maximum rate from 50 percent to 33 percent;3 (2) shifted an estimated $120 billion in taxation over a five-year period from individuals to corporations, while lowering the top corporate tax rate from 46 percent to 34 percent; (3) eliminated the preferential tax rate on capital gains,

____________________
Elizabeth Wharton assisted in the preparation of this paper.
1
John F. Witte, The Politics and Development of the Federal Income Tax ( University of Wisconsin Press, 1985), p. 380 (italics in original).
2
Jeffrey H. Birnbaum and Alan S. Murray, Showdown at Gucci Gulch: Lawmakers, Lobbyists, and the Unlikely Triumph of Tax Reform ( Random House, 1987), p. 285.
3
The new tax structure's highest marginal rate was 28 percent, but because of a phaseout of certain deductions, taxpayers within a prescribed income range had an effective marginal rate of 33 percent. Above this income range, the effective marginal rate dropped back to 28 percent. In 1990 Congress lowered the effective marginal rate of taxpayers in the 33 percent range to 31 percent, and it also raised the marginal rate for certain high-income taxpayers to this level. However, because of the interaction of various provisions of the tax code, some taxpayers still pay effective marginal rates above the 31 percent level.

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