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Tax Reforms in the USA from Reagan to Trump: Main Outcomes and Possible Impact on Inequality

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Tax Reforms in the USA from Reagan to Trump: Main Outcomes and Possible Impact on Inequality FACULTY OF ECONOMICS AND ADMINISTRATION Tax reforms in the USA from Reagan to Trump: main outcomes and possible impact on inequality Diploma Thesis ANASTASIIA GONCHAROVA Supervisor: doc. Ing. Robert Jahoda, Ph.D. Public Finance and Economics Brno 2021 TAX REFORMS IN THE USA FROM REAGAN TO TRUMP: MAIN OUTCOMES AND POSSIBLE IMPACT ON INEQUALITY 2 TAX REFORMS IN THE USA FROM REAGAN TO TRUMP: MAIN OUTCOMES AND POSSIBLE IMPACT ON INEQUALITY Master's thesis description Academic year: 2020/2021 Student: Anastasiia Goncharova Programme: Public Finance and Economics Tax reforms in the USA from Reagan to Trump: main Title of the thesis/dissertation: outcomes and possible impact on inequality Tax reforms in the USA from Reagan to Trump: main Title of the thesis in English: outcomes and possible impact on inequality Aim: The objective of this thesis is to estimate the outcomes of tax reforms in the United States from Reagan’s to Trump’s presidency and investigate the relationship between tax changes and inequality in the society. It requires a rigorous analysis of the objectives and results of previous tax reforms. The study adopts the existing survey methodology in modern literature and develops an Thesis objective, procedure and approach to establish perspectives of the latest tax reform methods used: and its impact on inequality. Suggested structure: 1) Description of the US tax system and main previous tax reforms 2) Literature review on the evaluation of the tax reforms 3) Det il analysis of the two major reforms 4) Evaluation of the Trumps reform by adopting an approach to studying the past tax policies 5) Conclusion and recommendations Extent of graphics-related work: According to thesis supervisor’s instructions Extent of thesis without 60 – 80 pages supplements: TAX REFORMS IN THE USA FROM REAGAN TO TRUMP: MAIN OUTCOMES AND POSSIBLE IMPACT ON INEQUALITY Contemporary U.S. tax policy. Edited by C. Eugene Steuerle. 2nd ed. Washington, D.C.: Urban Institute Press, 2008. xiii, 344. ISBN 9780877668459. SAEZ, Emmanuel and Gabriel ZUCMAN. The triumph of inj- ustice : how the rich dodge taxes and how to make them pay. First edition. New York: W.W. Norton & Company, 2019. xvi, 232. ISBN 9781324002727. Literature: ATKINSON, Anthony, Thomas PIKETTY and Emmanuel SAEZ. Top Incomes in the Long Run of History. Journal of Eco- nomic literature. 2011, roč. 1, s. 3-71. World inequality report 2018. Edited by Facundo Alveredo - Lucas Chancel - Thomas Piketty - Emmanuel Saez - Ga. Cambridge, Massachusetts: The Belknap press of Harvard University press, 2018. 332 stran. ISBN 9780674984554. Thesis supervisor: doc. Ing. Robert Jahoda, Ph.D. Thesis supervisor’s department: Department of Public Economics Thesis assignment date: 2020/04/23 In Brno, date: 2021/05/17 4 TAX REFORMS IN THE USA FROM REAGAN TO TRUMP: MAIN OUTCOMES AND POSSIBLE IMPACT ON INEQUALITY Bibliographic record Author: Anastasiia Goncharova Faculty of Economics and Administration Masaryk University Department of Public Economics Title of Thesis: Tax reforms in the USA from Reagan to Trump: main outcomes and possible impact on inequality Degree Programme: Master’s degree Field of Study: Public finance and economics Supervisor: doc. Ing. Robert Jahoda, Ph.D. Year: 2021 Number of Pages: 95 Keywords: Tax Reforms, Public Policy, Taxation, Inequality, Reagan, Trump, Clinton TAX REFORMS IN THE USA FROM REAGAN TO TRUMP: MAIN OUTCOMES AND POSSIBLE IMPACT ON INEQUALITY Abstract This paper aims to provide an overview of the significant tax changes that have been implemented in the United States over the past forty years, to examine the results they have had on the economy in general and on the population in particular, and to discover the impact on inequality. The first chapter presents a background of taxation in the United States, an overview of tax systems, including their purposes, categorization, and relationship to inequality. The second section examines the three most significant tax reforms from Reagan to the Trump administration and a summary of the results and proposals. The findings contribute to existing methods for evaluation of economic outcomes and income inequality by broadening the range of the questions examined to an extent of three most contentious reforms in the United States. TAX REFORMS IN THE USA FROM REAGAN TO TRUMP: MAIN OUTCOMES AND POSSIBLE IMPACT ON INEQUALITY Declaration I certify that I have written the Master’s Thesis “Tax reforms in the USA from Reagan to Trump: main outcomes and possible impact on inequality“ by myself under the supervi- sion of doc. Ing. Robert Jahoda, Ph.D. and I have listed all the literature and other sources in accordance with legal regulations, Masaryk University internal regulations, and the in- ternal procedural deeds of Masaryk University and the Faculty of Economics and Admin- istration. Brno, ....................................... Anastasiia Goncharova 8 TABLE OF CONTENT Table of Content Introduction 11 Chapter 1: Background of taxation: tax theory and tax system in the United States 13 1.1. Functions of taxation ....................................................................................................... 13 1.2. Principles of taxation ....................................................................................................... 17 1.3. Purposes of tax reforms ................................................................................................. 20 1.4. The United States tax systems overview ................................................................. 21 1.4.1. Levels and types of taxation in the United States ....................................... 21 1.4.2. Three major types of taxes in the United States ......................................... 22 1.4.3. Regressive, Proportional and Progressive taxes ........................................ 23 1.4.4. Tax progressivity and inequality ...................................................................... 24 1.4.5. The history of the U.S. taxation .......................................................................... 30 1.5. Literature review .............................................................................................................. 33 1.5.1. Economic Recovery Tax Act of 1981 and Tax Reform Act of 1986 ..... 33 1.5.2. Omnibus Budget Reconciliation Act of 1993 ............................................... 35 1.5.3. Tax Cuts and Jobs Act 2017 ................................................................................. 36 Chapter 2: Outcomes and impact on inequality of the major tax reforms in the United States 40 2.1. Methodology ....................................................................................................................... 40 2.2. Federal Revenues analysis ............................................................................................ 44 2.3. Government Spending Analysis .................................................................................. 48 2.4. Tax Rates .............................................................................................................................. 56 2.4.1. Tax rates: Reagan .................................................................................................... 57 2.4.2. Tax rates: Clinton .................................................................................................... 63 2.4.3. Tax rates: Trump ..................................................................................................... 67 2.5. Recommendations ............................................................................................................ 73 Conclusion 75 9 TABLE OF CONTENT References 79 Appendix A 83 Appendix B 87 Appendix C 91 List of Figures 94 List of Tables 95 10 INTRODUCTION Introduction Taxation has always been one of the most disputable and widely discussed topics throughout history. It is easy to understand why it continues to attract widespread attention nowadays as well. Taxes are crucial to the functioning of the states and directly affect the daily lives of all citizens. For the governments they serve as a source of revenue to pay for the public services, such as healthcare and education, defence, roads, legal protection through the courts, welfare assistance to the vulnerable groups of society. For individuals the imposition of taxes influences the distribution of personal income, changes the division of wealth across different groups and may impact their activities in various ways to reduce the tax burden. Taxation plays a very important role in politics and public discourse. Politicians implement risky tax reforms and then have to deal with the consequences if they are elected. Businesses advocate for tax breaks, claiming that doing so would result in more employment and growth. The way how the states apply taxation defines their relationship with the citizens and affects the economy overall, especially when it comes to shifting between tax bases such as income or spending. The decisions made by policymakers may become favourable for one group and particularly burdensome for another. The extent to which public policies should redistribute the income between the poor and rich and fairness of such policies is a matter of moral judge and varies between the modern states significantly. In the tax systems of most advanced countries like the United States, the emphasis is done on progressivity of taxation which aims to reduce income inequality between the households. However, many researchers and economists
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