Effects of Tax Reform on Labor Supply, Investment, and Saving

Abstract

The U.S. tax system received two major overhauls during the 1980s: the tax cuts of 1981 and the Tax Reform Act of 1986. Supporters of both reforms argued that major changes in tax policy could boost saving, investment, labor supply, and entrepreneurship. Eventually, it was argued, such changes could reverse the slowdown in economic growth that began in the early 1970s and spur improvements in American living standards. The aim of this paper is to assess whether the goals of increased labor supply and capital formation were achieved.