Tax Reform Act of 1986

The Tax Reform Act of 1986 was the most sweeping rewrite of the federal tax code in a generation. It lowered the top individual rate to 28 percent, eliminated dozens of deductions, and was passed with broad bipartisan support.

By the mid-1980s, the federal tax code had become a thicket of loopholes, shelters, and special-interest carve-outs. Wealthy taxpayers routinely paid effective rates lower than their secretaries through aggressive use of deductions. President Reagan, Senator Bill Bradley, and Representative Dan Rostenkowski led an unusual bipartisan effort to clean up the code. The Tax Reform Act of 1986 collapsed the individual rate structure to two brackets at 15 and 28 percent, down from a top rate of 50 percent. It eliminated the preferential treatment of capital gains, scrapped passive-loss tax shelters, and ended dozens of credits and deductions. To pay for the rate cuts, the corporate rate fell from 46 to 34 percent while corporate loopholes were closed. The bill was revenue-neutral on paper and was a triumph of supply-side economics blended with the older liberal goal of a fairer base. It also embodied a principle conservatives and many liberals shared at the time: a simpler tax code with lower rates and fewer loopholes is preferable to a complicated one with high rates and many exceptions. In the years that followed, Congress steadily reintroduced the deductions and credits that the 1986 act had removed. By the time of the Tax Cuts and Jobs Act of 2017, the code was once again dense with provisions for favored activities. The 1986 reform is still cited as a model for what bipartisan tax legislation can accomplish.