The Tax Reform of 1986 was passed by the U.S. Congress on October 1986. The Act was meant to broaden the tax base, eliminate existing tax shelters and simplify the existing income tax code. It is widely referred to as the second of the “Reagan tax cuts” (United States, 2011). The bill in the congress was supported by Democrats, in the House of Representatives by Richard Gephardt and in the Senate by Bill Bradley.
The Act resulted in the reducing of the individual tax rates of the Americans thereby increasing neutrality in the tax system. The Act also eliminated $30 billion loopholes annually and increasing capital gains taxes, miscellaneous excises and corporate taxes. This Act did not result in the reduction of revenues but increased them by almost 45.5 billion dollars in the year in which it was enacted.
Who were the litigants? (For a court case) Or (for a law), who were the politicians supporting or opposing the legislation?
The democrats, Richard Gephardt and Bill Bradley supported the legislation and followed it course till it was passed (Claus, 2010). To them, the tax reforms in the country were a requirement for the development of the country. In the country at the time, income inequality in the country had largely increased creating a large gap between the poor and the rich. The rich were getting richer, and poor were getting poorer. Something was to be done in order for the gap to be reduced.
Also, tax reforms were needed to reduce the loopholes that existed in the previous tax system. People were evading taxes easily hence denying the government the funds that were genuinely for the public. Something needed to be done so as to reduce this. The democrats with their fiscal and minimum tax plans had to do something to help the situation. Thus, they came about with this reform policy which they supported to the end.
Politically, the republicans are always against the democrats. For this, they had to go against the tax bill claiming that it would increase taxes for business owners and the rich making it hard for them to enjoy the benefits of their hard work (Throneberry, 1993). Therefore, they opposed the bill in all houses till it was passed to be an Act in 1986.
What Problem was addressed?
The country at the time was experiencing low income from taxes and needed to finance the increased number of projects. This meant an increase in taxes for the high income areas and these was the wealthy and the businesses in the country. The tax bill resulted in an increase in the tax rates for the high income earners, reducing the tax rate for the low income earners. In that year in which it was implemented it increased the revenues to the government by $52 billion.
In the country at the time, the number of parents claiming tax deductions due to the number of children dependent on them had increased. These people would claim deductions exceeding the number of people that are dependent on them. This would create a problem as many people were evading taxes through this fraudulent means. The government had to come up with some way to stop this.
The economic growth rate of the country had hit a down low; it was declining instead of growing. The number of investments in the country had decreased by a significant figure as people preferred to save rather than invest back to the economy. This proved to be resulting in negative effects to the economy as it was stagnating instead of growing.
The Republicans believe that the government should use taxation to benefit the general public while the Democrats believed in taxation as a means of making businesses prosper and making the rich richer. This created a rift between the two when it came to matters of taxation. This means that the two were in opposing sides when the tax reform bill was introduced in 1986.
The democrats won on this case; the bill was passed into an Act of parliament in 1986. President Reagan signed the bill days later in the south lawn at the Whitehouse. The Senate led by Bill Bradley and the House of Representative led by Richard Gephardt had something to smile about. Finally, the tax systems of the United States were going to be reform over the couple of years. This meant that reforms were to be implemented in the tax system of the country.
The Democrats had loosed this way; the rich were to be taxed more as compared to the poor, business and capital gain taxes had increased. This was a major blow to them, and they had to leave with it as it is.
What were the lasting effects?
Introducing the Reforms resulted in reducing the top tax rates of individuals from 50% to 28% and increasing the bottom rate from 11% to 15%. Most of the lower tax brackets were merged together, and the upper level of income of the bottom rate was raised from $5,720 to $29,750 per year (Zodrow & Mieszkowski, 2002). In the long run, these changes have resulted in the narrowing of the gaps between the rich and the poor. The income inequality that existed before is now narrower hence proving to be effective.
A change in the tax rate structure resulted in higher taxes to the business and corporation and taxes to the rich in the form of capital gains and health taxes. This means that there will be increased revenues for the government to spend on the public projects and for economic development. This has lasted to date as there are reforms are still implemented to date
The policy also resulted in the implementation of tax incentives that favored incentives to owner-occupied housing as opposed to the rental houses. This is just one of the few policies that affected the poor as opposed to the rich as it is well known that the poor live in rental houses. This resulted in the increase of their rents and reduced the taxes paid by the owners of the houses. In other places, the act resulted in an increase in the personal exemption for taxpayers and standard deductions. These policies have changed over the period hence did not last for a long time.
Over the next few years, the Act was in a position to reduce the loopholes in the tax system saving over $30 billion annually (Zodrow & Mieszkowski, 2002). This increased the revenues of the government by a significant percentage. However, other loopholes were created with time hence making the Act obsolete creating the need for a new policy to be implemented.
Claus, I. (2010). Tax reform in open economies: International and country perspectives. Cheltenham: Edward Elgar.
Tax Reform Act of 1986: This Package Contains by Date and Numerical Order All Taxnews and Excerpts from Taxnews That Address Tax Reform Act of 1986 Provisions. (1987). Washington, D.C.?: Dept. of the Treasury, Internal Revenue Service.
Throneberry, M. B. (1993). Determination of the effects of the tax reform act of 1986 on the income taxes of individual passive activity investors.
United States (2011). How did we get here?: Changes in the law and tax environment since the Tax Reform Act of 1986 : hearing before the Committee on Finance, United States Senate, One Hundred Twelfth Congress, first session, March 1, 2011. Washington: U.S. G.P.O.
Zodrow, G. R., & Mieszkowski, P. M. (2002). United States tax reform in the 21st century. Cambridge, UK: Cambridge University Press.