Tax Reform Act of 1986.

THE 1980's will be viewed by historians as a decade of significant changes in the U.S. tax code. As the decade began, the Economic Recovery Tax Act of 1981 put in place one of the largest tax reductions in history. In the next few years, other major tax legislation—including the Tax Equity and Fiscal Responsibility Act of 1982, the Social Security Amendments of 1983, and the Deficit Reduction Act of 1984—increased taxes, either to reduce mounting budget deficits or to restore the solvency of the social security trust fund. Most recently, the Tax Reform Act of 1986 put in place the most sweeping revision in the history of tax law. It provides for major reductions in the top tax rate for individuals and corporations; the individual top rate for 1988 will be the lowest since 1931. It reverses a 20year erosion in the tax burden of corporations. It repeals or limits many of the tax credits and deductions that encouraged certain kinds of investment. Although it does not significantly redistribute the tax burden between highand middle-income taxpayers, it abandons steeply progressive tax rates—once considered crucial to achieving an equitable income distribution—but compensates by limiting the tax preferences heavily used by higher income taxpayers. Finally, the act reduces the tax burden at the lower end of the income spectrum. The Tax Reform Act was passed by Congress on September 27, 1986, and signed by the President on October 22, 1986. Most of the provisions of the act were effective January 1, 1987; a few were retroactive to January 1, 1986, and some are phased in over the next few years. The act was designed to be revenue neutral over a 5-year period; that is, the act neither increases nor decreases Federal Government receipts compared with the previous tax law. This neutrality was achieved by offsetting large reductions in individual and corporate income tax rates with a broadening of the tax bases by the elimination of various deductions, tax shelters, and preferential tax treatments, such as for capital gains. According to the Department of the Treasury, the act reduces unified budget receipts $5.4 billion over fiscal years 1987-91. Receipts are increased in 1987 and 1988 and reduced in 1989-91; receipts are increased in the early years because most of the provisions increasing taxes, such as repeal of tax preferences, are effective in early 1987 while those reducing taxes, largely changes to the corporate tax structure, do not occur until later.