U.S. Tax Reforms and Their Effects on Average Tax Rates

Tax reforms over the past twenty-five years in the United States have dramatically altered the income tax system with numerous changes in base definitions and tax rates. With all of the changes that have taken place, including the most recent tax cuts in 2001 and 2003, interest in the effect of tax reforms on the distribution of the tax burden is at an all time high. This paper addresses the question by examining average tax rates (ATRs) over time at various points of the income distribution to see how tax reforms have had an impact in this measure of tax burden. To do so meaningfully, however, requires ATRs computed using a consistent measure of income developed by the IRS - the retrospective income concept. In this paper I review the reform efforts starting with the Economic Recovery Act of 1981 (ERTA81), reaching a high water mark with the Tax Reform Act of 1986 (TRA86), and continuing through the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA03). After review of these tax acts and their main features, simple time series models are estimated to examine the effects of the acts on average tax rates at various points of the income distribution. In each case, two models are estimated with a simple trend model and a model that includes a set of tax reform regime variables for the seven tax reforms since 1981. The paper concludes with a summary of the evidence on the effects of these tax reform acts on the distribution of ATRs across the income distribution