TY  - JOUR
AU  - Poterba,James M.
TI  - Why Didn't the Tax Reform Act of 1986 Raise Corporate Taxes?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3940
PY  - 1991
Y2  - December 1991
UR  - http://www.nber.org/papers/w3940
L1  - http://www.nber.org/papers/w3940.pdf
N1  - Author contact info:
James M. Poterba
Department of Economics
MIT, E52-350
50 Memorial Drive
Cambridge, MA  02142-1347
Tel: 617/253-6673
Fax: 617/258-7804
E-Mail: poterba@nber.org
M1  - published as James M. Poterba. "Why Didn't the Tax Reform Act of 1986 Raise Corporate Taxes?," in James M. Poterba, editor, "Tax Policy and the Economy, Volume 6" The MIT Press (1992)

M2  - featured in NBER digest on 1992-03-01
AB  - The Tax Reform Act of 1986 was projected to raise corporate taxes by more than $120 billion over the 1986-1991 period. Actual federal corporate tax receipts in the last five years have fallen far short of these projections. This paper explores the factors that have contributed to this shortfall. The most important factor is lower-than-expected corporate profits. The underperformance of corporate profits can be attributed to three principal causes. First, the predicted rates of corporate profits when the 1986 Tax Reform Act was enacted were high by historical standards. The U.S. economy in the late 1980s did not experience total returns on corporate capital, the combined return to equity and debt investors, as high as the forecasts would have suggested. Second, corporate interest payments were significantly higher, as a share of corporate operating income or GNP, in the late 1980s than in the years leading up to the Tax Reform Act. This reduced the corporate tax base, and may in substantial part ultimately be attributable to the marginal incentive effects for debt and equity finance provided in the 1986 Tax Reform Act. Third, also quite likely in reaction to recent tax changes, the last few years have seen rapid growth in the income reported by Subchapter S corporations. This income is taxed under the individual income tax. The rise of S corporations has therefore contributed to the erosion of the corporate income tax.
ER  -