Tax Reform Act of 1986

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The U.S. Congress passed the Tax Reform Act of 1986 (TRA) (Pub.L. 99-514, 100 Stat. 2085, enacted October 22, 1986) to simplify the income tax code, broaden the tax base and eliminate many tax shelters and other preferences. Referred to as the second of the two "Reagan tax cuts" (the Kemp-Roth Tax Cut of 1981 being the first), the bill was also officially sponsored by Democrats, Richard Gephardt of Missouri in the House of Representatives and Bill Bradley of New Jersey in the Senate.

The Tax Reform Act of 1986 was designed to be tax revenue neutral, because individual taxes were decreased while corporate taxes were increased. As of 2009, the Tax Reform Act of 1986 was the most recent major simplification of the tax code, drastically reducing the number of deductions and the number of tax brackets.


Income tax rates

The top tax rate was lowered from 50% to 28% while the bottom rate was raised from 11% to 15%. Many lower level tax brackets were consolidated, and the upper income level of the bottom rate (married filing jointly) was increased from $5,720/year to $29,750/year. This package ultimately consolidated tax brackets from fifteen levels of income to four levels of income. [1] This would be the only time in the history of the U.S. income tax (which dates back to the passage of the Revenue Act of 1862) that the top rate was reduced and the bottom rate increased concomitantly. In addition, capital gains faced the same tax rate as ordinary income.

The rate structure also maintained a novel "bubble rate." The rates were not 15%/28%, as widely reported. Rather, the rates were 15%/28%/33%/28%. The "bubble rate" of 33% simply elevated the 15% rate to 28% for higher-income taxpayers. As a result, for taxpayers after a certain income level, TRA86 provided a flat tax of 28%. This was jettisoned in the Omnibus Budget Reconciliation Act of 1990, otherwise known as the "Bush tax increase", which violated his Taxpayer Protection Pledge.

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