Tax Reform Act of 1986

Tax Reform Act of 1986
U.S. Government · Public domain · source
Shorttitle	Tax Reform Act of 1986
Enactedby	98th United States Congress
Citations	Public Law 99-514
Effective	October 22, 1986
Introducedby	Dan Rostenkowski

Tax Reform Act of 1986 was a significant piece of legislation signed into law by Ronald Reagan on October 22, 1986, with the aim of reforming the United States tax code. The act was the result of a bipartisan effort, led by Dan Rostenkowski and Bob Packwood, to simplify the tax code and eliminate many tax loopholes and deductions. The reform was influenced by the work of Alan Greenspan, Martin Feldstein, and other prominent economists such as Milton Friedman and Arthur Laffer. The Treasury Department, under the leadership of James Baker, also played a crucial role in shaping the legislation.

Introduction

The Tax Reform Act of 1986 was a comprehensive overhaul of the United States tax code, aimed at reducing tax rates and broadening the tax base. The act was designed to be revenue-neutral, meaning that it would not increase or decrease the overall amount of tax revenue collected by the Internal Revenue Service. The reform was influenced by the Kemp-Roth tax cut of 1981, which had reduced tax rates across the board, and the Economic Recovery Tax Act of 1981, which had also reduced tax rates and introduced indexation of tax brackets. The act was also shaped by the work of the Treasury Department's Tax Reform Task Force, led by Stanley Surrey, and the National Economic Commission, established by Congress in 1987.

Background

The Tax Reform Act of 1986 was the result of a long process of tax reform efforts, dating back to the 1960s and 1970s, when presidents such as John F. Kennedy and Jimmy Carter had proposed various tax reform plans. The act was also influenced by the work of economists such as Gary Becker, George Stigler, and Milton Friedman, who had argued for a more efficient and simple tax system. The Congressional Budget Office, led by Rudolph Penner, played a crucial role in analyzing the fiscal impact of the reform, while the Joint Committee on Taxation, chaired by Dan Rostenkowski, was responsible for drafting the legislation. The Senate Finance Committee, led by Bob Packwood, and the House Ways and Means Committee, chaired by Dan Rostenkowski, also played key roles in shaping the legislation.

Provisions

The Tax Reform Act of 1986 introduced several significant changes to the United States tax code, including the reduction of the top marginal tax rate from 50% to 28%, and the elimination of many tax loopholes and deductions. The act also introduced a new system of tax brackets, with two main brackets: 15% and 28%. The reform also increased the standard deduction and personal exemption, and introduced a new alternative minimum tax to ensure that corporations and high-income individuals paid a minimum amount of tax. The act was influenced by the work of tax experts such as Charles Schultze, Herman Kahn, and William Niskanen, and was designed to be consistent with the principles of supply-side economics, as advocated by Arthur Laffer and Jude Wanniski.

Legislative History

The Tax Reform Act of 1986 was introduced in Congress in 1985, and underwent significant changes and negotiations before its passage in 1986. The legislation was supported by a bipartisan coalition, including Republicans such as Ronald Reagan, Bob Dole, and Newt Gingrich, and Democrats such as Dan Rostenkowski, Bill Bradley, and Richard Gephardt. The American Bar Association, the National Association of Manufacturers, and the U.S. Chamber of Commerce also played important roles in shaping the legislation. The Congressional Budget Office and the Joint Committee on Taxation provided critical analysis and estimates of the fiscal impact of the reform.

Impact and Consequences

The Tax Reform Act of 1986 had significant impacts on the United States economy and tax system. The reform led to a significant reduction in tax rates and an increase in economic growth, as predicted by economists such as Arthur Laffer and Milton Friedman. The act also led to a significant increase in tax revenue, as the alternative minimum tax and other provisions ensured that corporations and high-income individuals paid a minimum amount of tax. The reform was also praised by tax experts such as Charles Schultze and Herman Kahn, who argued that it had simplified the tax code and reduced tax complexity. The Internal Revenue Service, led by Lawrence Gibbs, played a crucial role in implementing the reform and ensuring its success.

Criticisms and Legacy

Despite its successes, the Tax Reform Act of 1986 has also been subject to criticisms and challenges. Some economists, such as Joseph Stiglitz and Paul Krugman, have argued that the reform was too focused on tax cuts and did not do enough to address issues of income inequality and tax fairness. Others, such as Robert Kuttner and Jeff Madrick, have argued that the reform was too complex and did not do enough to simplify the tax code. The Tax Reform Act of 1986 has also been compared to other tax reform efforts, such as the Tax Reform Act of 2017, which was signed into law by Donald Trump. The American Taxpayer Relief Act of 2012, signed into law by Barack Obama, also built on the legacy of the Tax Reform Act of 1986. The Bipartisan Budget Act of 2013, negotiated by Paul Ryan and Patty Murray, also reflected the principles of the Tax Reform Act of 1986. Category:United States federal taxation legislation