The Tax Reform Act of 1986 stands as a landmark piece of legislation in the history of the United States tax system. Enacted by President Ronald Reagan on October 22, 1986, this act marked the most extensive review and overhaul of the Internal Revenue Code since the inception of the income tax in 1913. The primary goal of the Tax Reform Act of 1986 was to simplify the tax code, broaden the tax base, and eliminate numerous tax shelters and preferences that had accumulated over the years.
One of the key features of the Tax Reform Act of 1986 was the significant reduction in individual tax rates. The top tax rate for individuals was lowered from 50 to 28 percent, while the bottom rate was raised from 11 to 15 percent. This adjustment aimed to create a more equitable tax system by reducing the burden on high-income earners while increasing taxes on lower-income individuals.
In addition to changing tax rates, the Tax Reform Act of 1986 also made significant alterations to deductions and exemptions. The act eliminated provisions that allowed individuals to deduct interest on consumer loans, while simultaneously increasing personal exemptions and standard deduction amounts. These changes were designed to simplify the tax filing process and reduce the complexity of the tax code.
Another important aspect of the Tax Reform Act of 1986 was the strengthening of the alternative minimum tax provisions for individuals. This provision, first created in 1978, ensures that individuals pay a minimum amount of tax after taking into account all eligible exclusions, credits, and deductions. By enhancing these provisions, the act aimed to prevent high-income individuals from avoiding taxes through various loopholes and deductions.
On the corporate side, the Tax Reform Act of 1986 reduced the corporate tax rate from 50 to 35 percent. This reduction aimed to make American businesses more competitive globally by lowering their tax burden. Additionally, the act restricted deductions for certain business expenses, such as business meals, travel, and entertainment, in an effort to close loopholes and prevent abuse of the tax system.
Following the passage of the Tax Reform Act of 1986, tax code revision became a more frequent occurrence, with subsequent administrations enacting further changes to the tax system. The Revenue Reconciliation Acts of 1990, 1993, and 1997 under Presidents George H.W. Bush and Bill Clinton, as well as the Economic Growth and Tax Relief Act and Reconciliation Act of 2001 under President George W. Bush, all built upon the foundation laid by the Tax Reform Act of 1986.
In conclusion, the Tax Reform Act of 1986 was a pivotal moment in the history of the U.S. tax system. By simplifying the tax code, broadening the tax base, and eliminating numerous tax shelters and preferences, this act laid the groundwork for future tax reforms and reshaped the way Americans pay their taxes.
