Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts

of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org

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Today's July 26, 2012, and my guest is Tammy Frisbee, a research fellow at Stanford University's

Hoover Institution. Tammy, welcome to econtalk. Good to be here with you. Our topic for today is

the United States Tax System and prospects for reform or maybe just change. We'll see. I want to

start with going back to the 1980s, something I know you've looked at. There were quite a few

changes in the U.S. tax code beginning in 1981. What were the most important and what was the timing

of those changes?

The first important change is in 1981 with the tax recovery, excuse me, economic recovery tax act.

And that's one of the landmark pieces of tax legislation that comes out of the Reagan

administration. That's when most people talk about Ronald Reagan cutting taxes. That's the

first bill they're talking about. That's the piece of legislation with which we bring the top

marginal tax rate from nearly 70% down to 50%. It also makes an important structural change

to the tax code that we continue to benefit from, and that's the indexing of the marginal rates

to inflation. Also, the personal exemption and the standard deduction were indexed to inflation

with the 1981 act, and we all can probably remember, although I'll have to admit that I was not

the conscious adult during most of those years. That was the bracket creep that happened because

the tax code wasn't indexed to inflation prior to 1981, was a revenue machine for the federal

government. It allowed-

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