Tax Reform Act of 1986
The Tax Reform Act of 1986 is a significant piece of legislation in U.S. tax history, known for its major alterations to federal tax structure without increasing overall tax levels. The act notably lowered the top individual tax rate from 50% to 28%, while simultaneously raising the bottom rate from 11% to 15%, marking a rare occurrence in tax policy. It also equalized capital gains tax rates with those on ordinary income and provided increased incentives for investment in owner-occupied housing through enhanced mortgage interest deductions.
Originating from a Democratic proposal and influenced by President Ronald Reagan’s emphasis on tax reform, the act aimed to simplify the tax code and eliminate loopholes. Despite its revenue-neutral designation, the act shifted tax burdens from individuals to corporations, reflecting a significant change in the taxation landscape. Its passage was noteworthy for achieving bipartisan support in Congress, although it faced opposition from various special interest groups.
The aftermath of the act saw a substantial number of amendments and adjustments to the tax code, suggesting that while the 1986 reform made substantial changes, many of its intended reforms were later diluted by additional loopholes and exceptions. Overall, the Tax Reform Act of 1986 remains a pivotal reference point in discussions about taxation and fiscal policy in the United States.
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Tax Reform Act of 1986
Identification U.S. federal legislation
Date Became law on October 22, 1986
The Tax Reform Act of 1986 made major changes in how income was taxed in the United States by simplifying the tax code, reducing the top marginal income tax rate, and eliminating many tax shelters and other preferences.
Though it was officially deemed revenue neutral because it did not increase overall tax levels, the Tax Reform Act of 1986 significantly altered the distribution of federal taxes. The top tax rate was lowered from 50 percent to 28 percent, and the bottom rate was raised from 11 percent to 15 percent, the only time in history that the top rate was reduced and the bottom rate was simultaneously increased. Other reforms of the act included reducing the capital gains tax to the same tax rate as that for ordinary income and increasing incentives favoring investment in owner-occupied housing relative to rental housing by increasing the home mortgage interest deduction. Because the measure was seen as revenue neutral, the act passed by a large bipartisan majority in Congress.
The bill originated in a Democratic tax reform proposal first advanced in August, 1982, by Senator Bill Bradley and Representative Dick Gephardt, as well as in President Ronald Reagan’s call for tax reform in his January, 1984, state of the union address. As enacted, the legislation cut individual tax rates more than had originally been anticipated, but it cut corporate taxes less than originally proposed. The law shifted tax liability from individuals to corporations, reversing a long trend of corporate taxes supplying a decreasing share of federal revenues.
Enactment of the measure was accomplished through the perseverance of its chief backers in Congress over the objections of many special interests that would lose the favored status they enjoyed under the current tax code. Although the law was originally envisioned as a way of eliminating all tax loopholes, the tax reform debate almost immediately focused on which tax loopholes would be preserved or added under the new law. Despite the nation being mired in a period of large budget deficits, Reagan refused to support any tax increases, and as a result, the bill neither raised nor reduced total federal tax collections over a five-year period after its enactment. Ultimately, that principle allowed the bill’s adherents to turn back costly amendments to restore tax breaks, because the sponsors of those amendments were not able to produce offsetting revenues.
Impact
The Tax Reform Act of 1986 was a considerable change from the previous tax code. The fact that Congress passed serious tax reform at all was remarkable, considering all the obstacles it faced. Of all post-World War II-era domestic goals, tax reform was among the most politically difficult to bring about. After the 1986 tax reforms were enacted, however, Congress would go on to make at least fourteen thousand further changes to the tax code, very few of which could be considered reform. Many of the loopholes and exceptions that were excised by the Tax Reform Act of 1986 were later essentially restored.
Bibliography
Birnbaum, Jeffrey, and Alan Murray. Showdown at Gucci Gulch. New York: Random House, 1987.
Fisher, Patrick. Congressional Budgeting: A Representational Perspective. Lanham, Md.: University Press of America, 2005.
Peters, B. Guy. The Politics of Taxation . Cambridge, England: Blackwell, 1991.