The Tax Reform Act of 1986 and the Progressivity of the Individual income Tax

Abstract

The Tax Reform Act of 1986 instituted some of the most dramatic revisions of the federal income tax since its inception. The primary purpose of this article is to examine the impact of the changes incorporated in TRA86 on the progressivity of the federal individual income tax. Structural and distributional indices were used to measure progressivity. Estimates of these indices were derived using seemingly unrelated regressions and data from the 1984 Individual Tax Model. The results indicate that when progresscvity is measured locally, determination of which system is more progressive varies as income rises.

Progressivity and the Tax Reform Act of 1986: A Reexamination and Additional

“…None of the ARP coefficients for income groups between $.6 and $10 million is statistically significant, suggesting a proportional tax structure over this range in 1988. However, the 1988 progressivity coefficient for the highest income group was also positive (albeit small) and statistically significant, which contrasts with Kern's (1990) finding based on simulated postreform tax payments.…”

“…In summary, econometric analysis using actual post-TRA86 tax payments data yields two general conclusions that contrast with Kern's (1990) study of simulated postreform data. First, the 1986 tax reform appears to have had virtually no impact on local progressivity measures in the income groupings under $100,000, where the vast majority of U.S. taxpayers reside .8 Second, the tax structure has become significantly more progressive for some income groups between $1 and $10 million, apparently because the 1986 legislation has eliminated the tax regressivity that existed in the prereform tax system.…”

“…Consequently, simulated tax data are unlikely to capture all the actual effects of tax reform. Kern's (1990) study was based on simulated rather than actual postreform tax data because post-1986 data were not available when her analysis was conducted.2 The primary purpose of this article is to determine whether Kern's findings persist when her econometric tests of changes in income tax progressivity are redone using different pre-TRA86 data and actual rather than simulated post-TRA86 tax payments. This reexamination seems appropriate, given that the political and economic consequences of tax progressivity-and possible shifts in progressivity during recent years-continue to receive considerable attention in the United States.…”

“…In a recent study in this journal, Kern (1990) examined the impact on income tax progressivity of arguably the major tax legislation in years, the Tax Reform Act of 1986 (TRA86). Her general conclusion was that the effect of TRA86 on progressivity varies along the income scale.…”

“…Least squares regression analysis was used to estimate average tax rate equations in 1983 and 1988 for 31 groups of taxpayers classified according to expanded income, using the same income categories found in Kern's (1990) study. The regression results are reported in Table 1, along with Kern's results for comparative purposes.…”