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1986 Tax Reform Act

Although the ripple effects of the 1986 Tax Reform Act set in force by the Reagan Administration are too widespread and complicated to fully conceive, time has hinted at a few of the consequences. Nonetheless, here are three main changes made:

  1. Tax rates were cut for individuals and corporations. The top tax bracket for individuals was decreased from 50% to 28%, and the other tax brackets were also decreased, although not as significantly. This figure was later raised again during the Bush and Clinton Administrations and stands now at 39.6%. (see History of the Federal Income Tax) The top statutory corporate marginal tax rate was reduced from 46% to 34%. (see Ben-Horim et al.)

    Many believe the tax reductions have caused tax revenues to increase, starting with a 0.5% increase from 1986 to 1987. (see 1986 Tax Reform Act Changes Available) Also, most industrial divisions showed increases in total receipts from 1986 to 1988. (see 1986 Reform Act Reversed Trend of Tax Losses) On the other hand, instead of generating more revenue, critics charge the tax reductions as contributing to the enormous swelling of the federal deficit during that time. (see The Tax Reform Act of 1986)

  2. Tax laws were simplified. Marginal tax rates were consolidated, as with individuals that had $30,000 and under of un-sheltered taxable income, who all fell into the 15% marginal rate. (see Ben-Horim et al.) These and other changes, of course, were an advantage to most.

  3. The tax base was expanded. Capital gains were not given preferential status any longer (this alteration was later reversed). (see History of the Federal Income Tax) Many loopholes were mended so that individuals and businesses had more difficulty in finding tax shelters. (see Tax Reform Act of 1986)

    Many viewed this as making tax laws fairer, but others assert that the elimination of certain tax benefits discourages incentives for growth, as in real estate. (see Legacy of the Tax Reform Act of 1986)

Other changes were made such as forcing corporations to pay more to start pension plans, (see Tax Reform Act of 1986 ) eliminating tax deductions on IRAs of the wealthy, see (see The Tax Reform Act of 1986) and disallowing many personal and corporate deductions. (see Ben-Horim et al.)

Again, the far-reaching effects of this reform are controversial and difficult, if not impossible, to arrive at solid, truthful numbers that indicate its success or failure. Democrats still today are blaming this act for problems in the economy. Republicans claim the act to be an exceptional piece of tax legislation and a significant achievement of the Reagan Administration. see (see The Tax Reform Act of 1986)

Reference:

"The Impact of the 1986 Tax Reform Act on Corporate Financial Policy," Ben-Horim, Moshe, Hochman, Shalom, and Palmon, Oded, Financial Management, Autumn 1987. Vol. 16 Issue 3, p29.

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Copyright, Jeric Leavitt, 2002.