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The Notion of Tax Reform in Historical Perspective

With the recent release of the Trump administration’s tax plan, the notion of “tax reform” is back on the U.S. political agenda. While the president’s plan is surprisingly brief, consisting mainly of bullet points on a one-page document, the rhetoric supporting the plan has been nothing short of hyperbolic. Unsurprisingly, Trump has entitled his plan “Tax Reform that Will Make America Great Again.” Trump administration officials have specifically referred to their plan as “the most significant tax reform legislation since 1986,” referring to the last comprehensive, if fleeting, U.S. tax overhaul.[1]

Yet what constitutes true, fundamental tax reform? Most tax experts likely would agree that genuine tax reform requires some kind of transformational change to the existing tax regime. For some this could mean a significant change in the tax base, either by replacing our current income tax with some kind of consumption tax or perhaps solidifying our income tax base by removing certain cherished tax benefits.

For others, the touchstone for true tax reform is a dramatic modification of tax rates or exemption levels or both. Indeed, when tax experts today discuss tax reform they often evoke the landmark Tax Reform Act of 1986, just as Trump officials have. That law received bipartisan support, as it both lowered top marginal income tax rates and removed certain tax benefits. In the process, it solidified the income tax base.

Historians, by contrast, take a much broader perspective on the meaning of tax reform. Many scholars believe that fundamental tax reform has occurred only rarely in American history, in response to national emergencies or crises. As W. Elliot Brownlee and others have shown, the modern American tax system has been transformed mainly when historical conditions have required such profound changes—not when lawmakers have simply wished for a new tax system.[2]

During the Progressive Era and World War I, for example, the federal tax system underwent a dramatic shift. The social and political response to the massive economic inequalities of the Gilded Age culminated, after years of legal turmoil, with the ratification of the Sixteenth Amendment to the U.S. Constitution in 1913. The amendment invalidated an earlier U.S. Supreme Court decision and permitted the direct taxation of income without apportionment. In that same year, the federal government adopted a graduated income tax that applied mainly to the wealthy elite.

Once the United States entered WWI, though, the financial demands of waging a global war turned the newly enacted income tax into a fiscal workhorse. Top marginal rates skyrocketed to 77% during the height of the war, and exemption levels were lowered to include nearly 20% of American wage earners. Ultimately, income and newly created profits taxes accounted for roughly one-third of total wartime revenue.[3]

Although tax rates declined after the Great War and exemption levels increased to return the income tax to a class tax aimed at the richest citizens, a graduated income tax had become the cornerstone of the newly created modern American fiscal state. The late nineteenth century regime of indirect and regressive taxes associated with a national tariff was beginning to be eclipsed by a direct and progressive tax system. Comprehensive and durable tax reform had occurred.[4]

Similarly, during World War II, broader forces once again revolutionized the existing tax system. The demands of financing the war compelled lawmakers to transform the “class tax” aimed at the wealthy into a “mass tax” paid by a majority of citizens. Income tax rates skyrocketed once again and exemption levels fell precipitously. Whereas only about 4 million Americans paid income taxes before the war, afterwards nearly 43 million were now on the federal tax roll. As a result, income tax revenues grew from about $2 billion in 1939 to more than $35 billion in 1945. A war emergency had induced another fundamental transformation in fiscal policy, cementing U.S. reliance on the progressive income tax.[5]

A third great transformation in American public finance occurred in the last quarter of the twentieth century, but with dramatically different consequences. Beginning in the 1970s, in response to the economic crisis of stagflation and the longer decline of industrial capitalism, the United States witnessed an end to what economists have referred to as “the era of easy finance”—the end of a prolonged postwar period of robust economic growth that had permitted increased discretionary spending without increased taxes.[6]

As a result of these changing economic conditions, the longstanding U.S. commitment to direct and progressive taxation came under assault. Legal limits on state-level property taxes, such as California’s Proposition 13 (1978), ushered in a new way of thinking about tax reform. A concomitant revival of free market ideology meant that tax cuts and “supply-side” macroeconomic theories became the dominant rationales of national tax policymaking.[7]

This rightward turn in American politics profoundly affected tax policy. In his first term, President Ronald Reagan championed populist calls for an across-the-board tax cut. The Economic Recovery Tax Act of 1981, thus, included significant tax cuts and the indexing of income tax brackets for inflation, both of which brought tax relief to middle-class and wealthy Americans.

Although the subsequent 1986 Tax Reform Act is frequently heralded today as the last great tax reform effort, the 1981 law may have done more for fundamental and lasting tax reform. As historian Joseph Thondike has argued, “Reagan’s first-year tax cuts permanently altered the trajectory of federal fiscal policy, not to mention American politics and governance writ large.”

By buttressing the lowering of taxes with an anti-statist ideology, Reagan seemed to set a ceiling on top income tax rates. Since his presidency, few lawmakers have suggested a return to the post-WWII heights of American taxation. “Reagan’s cuts weren’t just a change in degree, they were a change in kind,” Thorndike has observed. “Income taxes today look very different than they did before Reagan changed the conversation.”[8]

Today, we are still living in the shadow of the Reagan legacy. The current Trump tax plan appears to be a weak version of the 1981 tax law. It has even less resemblance to the 1986 Act or any of the earlier, truly transformative tax reforms.

Still, this does not mean that fundamental tax reform is impossible. The anticipated growth in entitlement spending, driven by the aging of the baby-boom generation, may ultimately provide the type of emergency context or fiscal crisis that in the past has led to comprehensive tax reform. Short of such a crisis, however, it seems highly unlikely that we will witness tax reform that we can truly call transformative.

Ajay K. Mehrotra is the Executive Director and a Research Professor at the American Bar Foundation, a Chicago-based, independent research institute. He is also a Professor of Law at the Northwestern Pritzker School of Law, an Affiliated Professor of History at Northwestern University, and the author of Making the Modern American Fiscal State: Law, Politics, and the Rise of Progressive Taxation, 1877-1929 (2013).

[1] The Trump administration’s one-page tax proposal is available here:; for Trump’s statement, see; Julie Hirschfeld Davis and Alan Rappeport, “White House Proposes Slashing Tax Rates, Significantly Aiding Wealthy,” New York Times, April 26, 2017,

[2] W. Elliot Brownlee, Federal Taxation in America: A History (2016); Molly C. Michelmore, Tax and Spend: The Welfare State, Tax Politics, and the Limits of American Liberalism (2012); Joseph J. Thorndike, Their Fair Share: Taxing the Rich in the Age of FDR (2013); James T. Sparrow, Warfare State: World War II Americans and the Age of Big Government (2011).

[3] Hugh Rockoff, America’s Economic Way of War: War and the U.S. Economy from the Spanish–American War to the Persian Gulf War (2012); Hew Strachan, Financing the First World War (2004); Steven A. Bank, Kirk J. Stark, and Joseph J. Thorndike, War and Taxes (2008).

[4] Ajay K. Mehrotra, Making the Modern American Fiscal State: Law, Politics, and the Rise of Progressive Taxation, 1877–1929 (2013).

[5] Carolyn Jones, “Class Tax to Mass Tax: The Role of Propaganda in the Expansion of the Income Tax During World War II,” Buffalo Law Review 37 (1989), 685–737; Brownlee, Federal Taxation in America, 146.

[6] C. Eugene Steuerle, “Financing the American State at the Turn of the Century,” in Funding the Modern American State, 1941–1995: The Rise and Fall of the Era of Easy Finance, ed. W. Elliot Brownlee (1996).

[7] Isaac William Martin, The Permanent Tax Revolt: How the Property Tax Transformed American Politics (2008).

[8] Joseph J. Thorndike, “Tax Cuts Can Still Be Tax Reform,” Tax Analysts, Dec. 22, 2016,

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