Short of Euphoria

Abstract

The Tax Reform Act of 1986 is the most sweeping reform since the early 1940s when the pressures of war finance forced the transformation of the income tax into a mass tax, and made it the core of the federal tax system. Since then many adjustments have been made, but the basic structure of the tax has remained unchanged. Behind this nominal stability, however, a slow erosion of the tax base appears to have been at work. The widening of loopholes and emergence of high-income shelters gained momentum in recent years and undermined the public's faith in the income tax. The compounding of the investment tax credit and accelerated depreciation diluted and distorted the base of the corporation tax. The current reform reverses these trends, a major accomplishment that all reformers will welcome. But the reform is far from complete. Its base broadening goes only part of the way, and though substantial gains have been made, they have not come without a price. The pattern of rate reduction, involving a drastic flattening of bracket rates, signals retreat from the progressive taxation that was an essential feature of the income tax tradition. Further, focus on reform has diverted attention from meeting urgent revenue needs.