Treasury I and the Tax Reform Act of 1986: The Economics and Politics of Tax Reform

Abstract

During President Reagan's State of the Union Address in January 1984, he requested that Treasury Secretary Donald Regan prepare “a plan for action to simplify the entire tax code so that all taxpayers, big and small, are treated more fairly.” In response, the Department of the Treasury spent ten months preparing a report to the President that has come to be called Treasury I. This three-volume study explained the need for tax reform and the general directions such reform should take, provided a comprehensive set of proposals for reform of the income tax, and analyzed the feasibility and desirability of an American value-added tax. Following almost two years of public debate, the Tax Reform Act of 1986 became law on October 22, 1986. Though widely hailed as the most far-reaching reform of the nation's tax system since the 1940s, the 1986 Act falls far short of the promise of Treasury I. It is useful to devote attention to Treasury I, even though much of it failed to survive the legislative process. First, because Treasury I represented an attempt to formulate a workable tax system that closely approximates the economist's view of an ideal income tax, it is likely to condition future deliberations on tax reform both in the United States and in other countries. Second, the conceptually coherent proposals of Treasury I provide a standard against which to measure the hodge-podge of proposals that became law in the 1986 Act. Finally, a discussion of the decisions underlying Treasury I should prove informative to economists and political scientists interested in the process and substance of tax reform.