Working Paper: NBER ID: w2593
Authors: Don Fullerton; James B. Mackie
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.
Keywords: Tax Reform; Economic Efficiency; General Equilibrium Model
JEL Codes: H21; H25; H30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax policy changes (H29) | Economic efficiency (D61) |
| Economic Recovery Tax Act of 1981 (ERTA) (E65) | Saving and capital formation (E21) |
| Tax policy changes (H29) | Inter-asset distortions (G19) |
| Tax policy changes (H29) | Capital costs (G31) |
| Changes in tax law through 1985 (K34) | Changing beliefs about distortions (D83) |