due_logo
Search
Close this search box.

Table of Contents

Tax Reform Act of 1986

Definition

The Tax Reform Act of 1986 is a U.S. federal legislation that significantly reformed the United States’ tax code. Passed by Congress and signed into law by President Ronald Reagan, the act’s main goals were to simplify the tax system, eliminate several tax shelters, and broaden the tax base while lowering tax rates. It achieved this by reducing individual income tax brackets, lowering the highest corporate tax rate, and eliminating many deductions and credits.

Phonetic

Tæks rɪˈfɔrm ækt əv ˈnaɪntiˈn ˈeɪti ˈsɪks

Key Takeaways

  1. The Tax Reform Act of 1986 significantly simplified the tax code by lowering individual income tax rates and eliminating numerous deductions and exemptions. It lowered the top marginal tax rate for individuals from 50% to 28%, and raised the bottom rate from 11% to 15%.
  2. The Act introduced major corporate tax reforms, including a reduction in the top corporate tax rate from 46% to 34%. This change aimed to reduce tax evasion, promote economic growth, and make the tax system more competitive globally.
  3. It also expanded the scope of some tax credits, such as the earned-income tax credit (EITC), to provide greater financial relief to lower-income earners. The Act focused on ensuring a broader base and neutral treatment for different sources of income and types of taxpayers.

Importance

The Tax Reform Act of 1986 is important because it was a landmark piece of legislation that dramatically transformed the American tax system. It simplified the income tax code, eliminated many tax shelters, and restructured the system of deductions and exemptions. The act significantly broadened the tax base, reduced the top marginal tax rate for individuals from 50% to 28% (the lowest since 1931), and lowered the corporate tax rate from 46% to 34%. Additionally, it introduced alternative minimum tax for individuals, eliminated the preferential treatment of capital gains, and removed personal interest deductions. While the act made the tax system more equitable and efficient, it also marked a major bipartisan effort by the US Congress and the Reagan administration, showcasing the government’s ability to tackle complex issues and drive economic growth.

Explanation

The Tax Reform Act of 1986 was a significant piece of legislation in the United States, which aimed to simplify the federal income tax system, while also promoting fairness and stimulating economic growth. One of the primary purposes of the act was to overhaul and streamline the existing tax code, closing many loopholes and reducing the top marginal tax rates for both individual and corporate taxpayers. Additionally, it sought to shift the tax burden more equitably, ensuring that all individuals and businesses were contributing fairly to the overall revenue needs of the country.

As a result of the Tax Reform Act, various tax deductions and preferences were eliminated or limited, leading to a broader tax base and reduced tax rates. This in turn promoted greater economic efficiency by encouraging individuals and businesses to make investment and financial decisions based on economic factors rather than tax considerations. Moreover, the act also instituted measures that aimed to improve the transparency and administration of the tax system, making it easier for taxpayers to understand and comply with the tax regulations. Overall, the Tax Reform Act of 1986 represents a significant milestone in American tax history, as it sought to create a more equitable, efficient, and simpler tax system for the benefit of the nation and its citizens.

Examples

The Tax Reform Act of 1986 was a significant piece of legislation in the United States that aimed to simplify and streamline the federal tax code, eliminate certain deductions, and lower tax rates. Here are three real-world examples of the changes it brought:

1. Reduction of tax brackets and rates: The Tax Reform Act of 1986 reduced the number of tax brackets from 15 to 4 and lowered the top marginal tax rate from 50% to 28%. This change made the tax code less progressive and was believed to encourage economic growth by lowering the tax burden on individuals and businesses.

2. Elimination of deductions and tax shelters: The Tax Reform Act of 1986 eliminated several tax deductions and loopholes that were commonly used by high-income individuals and businesses to minimize their tax liabilities. Examples include the elimination of deductions for consumer interest (e.g., credit card interest) and strong limitations on passive income losses, which were being used as tax shelters. Additionally, the Act limited the deductibility of business meals and entertainment expenses.

3. Corporate tax rate reduction: The Tax Reform Act of 1986 reduced the corporate tax rate from 46% to 34%. This was intended to make U.S. corporations more competitive in the global market and attract foreign investment. This reduction in the corporate tax rate benefitted businesses by lowering their tax burden, thereby increasing their profitability and capacity to invest in growth and development.

Frequently Asked Questions(FAQ)

What is the Tax Reform Act of 1986?

The Tax Reform Act of 1986 (TR

Who signed the Tax Reform Act of 1986 into law?

The Tax Reform Act of 1986 was signed into law by President Ronald Reagan on October 22, 1986.

What were the major changes introduced by the Tax Reform Act of 1986?

The primary changes brought by the TR

How did the Tax Reform Act of 1986 affect deductions and tax shelters?

TR

What was the impact of the Tax Reform Act of 1986 on the federal budget deficit?

The Tax Reform Act of 1986 aimed to be revenue-neutral, meaning that the reduction in tax rates was supposed to be offset by the broadening of the tax base and elimination of deductions. However, many experts argue that the legislation contributed to a subsequent increase in the federal budget deficit in the late 1980s and early 1990s.

What are the long-term effects of the Tax Reform Act of 1986?

The Tax Reform Act of 1986 remains a benchmark for tax reform proposals in the United States. Some of the long-term effects include:- Setting the stage for future tax reforms and changes in tax policy.- Establishing the importance of balancing lower tax rates with the elimination of tax deductions and loopholes.- Shifting the focus of the tax system towards a broad-based, lower-rate framework.- Demonstrating that tax reform can garner bipartisan support and cooperation.

Has the Tax Reform Act of 1986 been amended since its enactment?

Yes, there have been subsequent tax reforms and modifications to the original TR

Related Finance Terms

  • Revenue-neutral policy
  • Lowered income tax rates
  • Corporate tax changes
  • Individual Alternative Minimum Tax (AMT)
  • Passive activity loss limitations

Sources for More Information

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More