Abstract In a series of reports issued prior to the Tax Reform Act of 1986 (TRA 86), Citizens for Tax Justice (CTJ) questioned the equity of the U.S. tax system. fri particular, CTJ asserted that very large U.S. corporations were not paying their "fair share" of taxes and supported its assertion with computations of effective tax rates (ETR) for a sample of 250 large U.S. corporations. In a study published subsequent to TRA 86, CTJ reports an Increase in the 1987 average federal ETR for a sample of 250 large corporations and concludes that the principal finding of this report is that tax reform is working" (1988, 9). The General Accounting Office (1990) also reports an increase in 1987 ETRs for a sample of large U.S. corporations but warns that more than one year of data should be analyzed and an evaluation of how ETRs change when additional income is earned should be undertaken. We address these and other issues. We extend the period studied to 1988 and 1989 and decompose observed changes in ETRs into an income effect, a tax rate effect, and a tax rule effect. Our analyses indicate that the observed changes in ETRs are largely due to the base-broadening tax rule changes in TRA 86 dominating the statutory tax rate reductions and changes in firms' income from pre- to post-TRA. Thus these results generally lend credence to CTJ's assertions that TRA 86 led to increased ETRs.
Shevlin et al. (Sun,) studied this question.