THE TAX REFORM ACT OF 1986: CONCENTRATED COSTS, DIFFUSE BENEFITS—AN INVERSION OF PUBLIC CHOICE

Alvin Rabushka

Contemporary Economic Policy, 1988, vol. 6, issue 4, 50-64

Abstract: The public choice paradigm asserts the superior force of concentrated benefits over diffuse costs in the political marketplace. Vote‐seeking politicians exchange favors for support to members of special interest groups, whereas the public at large places fewer demands on and have less clout with politicians. The historical evolution of the federal income tax fits the public choice paradigm. Each provision in the tax code benefits primarily a narrow interest. Little incentive exists for anyone to represent such general interests as a broad‐based, low‐rate, simple tax system. The Tax Reform Act of 1986 inverted the public choice paradigm. The general interest, in the form of lower tax rates, prevailed over legions of special interests—which lost their prized deductions. The reason for this inversion lay in the power of an idea—the political and economic appeal of a low top rate. Deductions were simply worth less at lower deductible rates, and the benefits of higher after‐tax income were readily apparent. A coalition of liberals seeking the abolition of special breaks for the rich and conservatives favoring the enhanced incentives in sharply lower tax rates together defeated the community of special interest groups.

Date: 1988
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