Corporate taxation and the efficiency gains of the 1986 Tax Reform Act
Rent the article at a discountRent now
* Final gross prices may vary according to local VAT.Get Access
The 1986 Tax Reform Act (TRA) had little effect on the overall U. S. effective capital income tax rate. However, TRA significantly reduced differences in effective taxation of corporate and noncorporate capital for a number of U. S. industries. The Mutual Production Model developed in Gravelle and Kotlikoff (1989) can be used to study the efficiency gains from the reduction in corporate tax wedges within industries. Unlike the Harberger Model, the Mutual Production Model permits both corporate and noncorporate firms to produce the same goods and, therefore, to coexist within a given industry.
This paper develops an 11-industry-55-year dynamic life cycle version of the Mutual Production Model. We use this model to study the steady-state efficiency gains associated with the new law. While we do not simulate the economy's transition path, our steady-state welfare changes are those that arise from compensating transitional generations for the first-order redistribution of income associated with the Tax Reform.
We find that the 1986 Tax Reform law reduces excess burden by 85 percent of our model's economy's present value of consumption. This efficiency gain reflects the Tax Reform's reduction in corporate-noncorporate tax wedges, particularly in those industries with significant noncorporate production. Measured as a flow the 1988 estimated efficiency gain from the Tax Reform Act is $31 billion.
- Auerbach, A. J. (1989) The deadweight loss from ‘nonneutral’ capital income taxation. J. Publ. Econ. 40: pp. 1-36
- Auerbach, A. J., Kotlikoff, J. (1987) Dynamic fiscal policy. Cambridge University Press, Cambridge
- Bailey, M. J. Capital gains and income taxation. In: Harberger, A. C., Bailey, M. J. eds. (1969) The taxation of income from capital. The Brookings Institution, Washington, D. C.
- Ballard, C. L., Fullerton, D., Shoven, J. B., Whalley, J. (1985) A general equilibrium model for tax policy evaluation. University of Chicago Press, Chicago
- Chamley, C. (1983) Entrepreneurial abilities and liabilities in a model of self selection. Bell J. Econ. 14: pp. 70-80
- Ebrill, L. P., Hartman, D. G. (1982) On the incidence and excess burden of the corporation income tax. Publ. Finance 37: pp. 48-58
- Eisner, R. Capital gains and income: real changes in the value of capital in the United States, 1946–77. In: Usher, D. eds. (1980) The measurement of capital. University of Chicago Press, Chicago
- Fullerton, D., Gillette, R., Mackie, J. (1987) Investment incentives under the Tax Reform Act of 1986. Compendium of tax research 1987. U. S. Government Printing Office, Washington, D. C.
- Fullerton, D., Henderson, Y. K. (1989) A disaggregate general equilibrium model of the tax distortions among assets, sectors, and industries. Int. Econ. Rev. 30: pp. 391-413
- Fullerton, D., Henderson, Y. K., Mackie, J. (1987) Investment allocation and growth under the Tax Reform Act of 1986. Compendium of tax research 1987. U. S. Government Printing Office, Washington, D. C.
- Fullerton, D., Shoven, J. B., Whalley, J. (1978) General equilibrium analysis of U. S. tax policy. Compendium of tax research 1978. Office of Tax Analysis. U. S. Government Printing Office, Washington, D. C.
- Fullerton, D., Shoven, J. B., Whalley, J. (1983) Replacing the U. S. income tax with a progressive consumption Tax. J. Pub. Econ. 20: pp. 3-23
- Gravelle, J. G. (1982) Effects of the 1981 depreciation revisions on the taxation of income from business capital. Natl. Tax. J. 35: pp. 1-20
- Gravelle, J. G. (1983) Capital income taxation and efficiency in the allocation of investment. Natl. Tax J. 36: pp. 297-306
- Gravelle, J. G. (1987) Tax policy and rental housing: an economic analysis. Congressional Research Service Report No. 87-536. Library of Congress, Washington, D. C.
- Gravelle, J. G. Comment on minimum taxes and comprehensive tax reform. In: Aaron, H. J., Galper, H., Pechman, J. A. eds. (1988) Uneasy compromise: problems of a hybrid income-consumption tax. The Brookings Institution, Washington, D. C.
- Gravelle, J. G. (1989) Differential taxation of capital income: another look at the Tax Reform Act. Natl. Tax J. 62: pp. 441-63
- Gravelle, J. G. (1991) Income, consumption and wage taxation in a life cycle model: separating efficiency from redistribution. Amer. Econ. Rev. 81: pp. 985-995
- Gravelle, J. G., Kotlikoff, L. J. (1989) The incidence and efficiency costs of corporate taxation when corporate and noncorporate firms produce the same good. J. Polit. Econ. 97: pp. 749-780
- Gravelle, J. G., Kotlikoff, J. (1993) Corporate tax incidence and inefficiency when corporate and noncorporate goods are close substitutes. Econ. Inqu. 31: pp. 501-516
- Hall, R. E. (1988) Intertemporal substitution in consumption. J. Polit. Econ. 96: pp. 339-357
- Hall, R., Jorgenson, D. W. (1967) Tax policy and investment behavior. Amer. Econ. Rev. 58: pp. 391-414
- Harberger, A. (1962) The incidence of the corporation income tax. J. Polit. Econ. 70: pp. 107-117
- Harberger, A. Efficiency effects of taxes on income from capital. In: Krzyzniak, M. eds. (1966) Effects of the corporation income tax. Wayne State University Press, Detroit
- Harberger, A. C. (1964) Taxation resource allocation, and welfare. The role of direct and indirect taxes in the federal reserve system. Princeton University Press, Princeton
- Harberger, A. C., Bruce, N. (1976) The incidence and efficiency effects of taxes on income from capital. J. Pol. Econ. 84: pp. 1285-1292
- Hendershott, P., Hu, S. C.: Investment in producer's durable equipment. In: Aaron, H. J., Pechman, J. A. (eds.) How taxes affect economic behavior. The Brookings Institution, 1981
- Hulten, C. R., Wykoff, F. C. The measurement of economic depreciation. In: Hulten, C. R. eds. (1981) Depreciation, inflation and taxation of income from capital. The Urban Institute, Washington, D. C.
- Lucas, R. E. (1978) On the size distribution of business firms. Bell. J. Econ. 9: pp. 508-523
- Nelson, S., Petska, T. (1989) Partnerships, passive losses, and tax reform. Stat. Income Bull. 9: pp. 31-39
- Rosenberg, L. G. Taxation of income from capital by industry group. In: Harberger, A. C., Bailey, M. J. eds. (1969) The taxation of income from capital. The Brookings Institution, Washington, D. C.
- Shoven, J. B. (1976) The incidence and efficiency effects of taxes on income from capital. J. Polit. Econ. 84: pp. 1261-1283
- Shoven, J. B., Whalley, J. (1972) A general equilibrium calculation of the effects of differential taxation of income from capital in the U. S.. J. Publ. Econ. 1: pp. 281-322
- U. S. Department of Commerce: Input-output accounts of the U. S. economy, 1981. Surv. Curr. Business 42–57 (1987)
- U. S. Department of Treasury: Internal revenue service: Statistics of income. Washington, D. C.: U. S. Government Printing Office, various years
- Corporate taxation and the efficiency gains of the 1986 Tax Reform Act
Volume 6, Issue 1 , pp 51-81
- Cover Date
- Print ISSN
- Online ISSN
- Additional Links