Tax Reform Act of 1986

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Frank L. Winfrey is a professor of strategy at UGSM-Monarch Business School in Switzerland. He contributed several articles to SAGE Publications’ Encyclopedia of Business Ethics and Society (2008).

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Tax Reform Act of 1986, the most-extensive review and overhaul of the Internal Revenue Code by the U.S. Congress since the inception of the income tax in 1913 (the Sixteenth Amendment). Its purpose was to simplify the tax code, broaden the tax base, and eliminate many tax shelters and preferences. It was intended to be essentially revenue-neutral, though it did shift some of the tax burden from individuals to businesses. Signed into law by Republican President Ronald Reagan on October 22, 1986, the Tax Reform Act of 1986 (TRA) was sponsored in Congress by two leading Democrats, Representative Richard Gephardt of Missouri and Senator Bill Bradley of New Jersey, and was strongly supported by the chairman of the House Ways and Means committee, Democratic Representative Dan Rostenkowski of Illinois. Support for broad revision of the tax code had been mobilized at the behest of the Reagan administration in 1985 with the founding of the ad hoc organization Americans for Tax Reform by Grover Norquist.

The TRA lowered the top tax rate for individuals from 50 to 28 percent and raised the bottom rate from 11 to 15 percent. The TRA also ended tax code provisions that allowed individuals to deduct interest on consumer loans. However, it increased personal exemptions and standard deduction amounts and indexed them to inflation. The TRA strengthened the “ alternative minimum tax” provisions of the income tax code for individuals, which were first created in 1978. (The alternative minimum tax is the least that an individual or corporation must pay after all eligible exclusions, credits, and deductions have been taken.) The corporate tax rate was reduced from 50 to 35 percent. The TRA also reduced the allowances for certain business expenses, such as business meals, travel, and entertainment, and restricted deductions for certain other expenses.

After the passage of the act, tax code revision became a much more frequent event, resulting in the return of many tax breaks and an increase in the number of tax brackets. Of particular note were the Revenue Reconciliation Act of 1990 under President George H.W. Bush, the Revenue Reconciliation Acts of 1993 and 1997 under President Bill Clinton, and the Economic Growth and Tax Relief Act and Reconciliation Act of 2001 under President George W. Bush.