Tax Reform Act of 1986

Tax Reform Act of 1986 Tax Legislation Income Tax Tax Incentives Revenue Collection Economic Policy Social Policy
The Tax Reform Act of 1986 (TRA 1986) represents the most comprehensive tax legislation since the onset of World War II. It aimed to ensure that individuals with equal incomes paid equal taxes, minimized the role of tax incentives in addressing social and economic issues, and primarily used taxes to generate revenues.
On this page

Definition

The Tax Reform Act of 1986 (TRA 1986) is a significant U.S. federal law enacted to reform the tax code comprehensively. It simplified the income tax code, broadened the tax base, eliminated many tax shelters, and aimed to make the tax system fairer by ensuring that individuals with similar incomes paid similar tax amounts. This legislation reduced the top tax rate on ordinary income and increased the standard deduction and personal exemptions.

Key Objectives

  • Tax Fairness: Ensuring that taxpayers with equivalent incomes pay commensurate taxes.
  • Simplification: Streamlining the tax code to make it more understandable and manageable.
  • Broadening Tax Base: Reducing the number of deductions, exemptions, and credits to ensure more income fell under the taxable category.
  • Revenue Focus: Shifting the focus from tax incentives for social and economic problems to revenue generation.

Examples

  1. Top Marginal Tax Rate Reduction:

    • Before TRA 1986: Top individual tax rate was 50%.
    • After TRA 1986: Top individual tax rate was reduced to 28%.

  2. Standard Deduction Increase:

    • For a married couple: Increased from $3,670 to $5,000.
    • For single filers: Increased from $2,480 to $3,000.

  3. Personal Exemptions:

    • Increased from $2,080 to $2,000 per exemption.

Frequently Asked Questions (FAQs)

  1. What was the primary goal of the Tax Reform Act of 1986?

    • The primary objective was to make the tax system fairer by ensuring that individuals with equal incomes paid the same amount of taxes.

  2. How did TRA 1986 affect tax rates?

    • It reduced the top individual tax rate from 50% to 28% and lowered the corporate tax rate.

  3. What changes did TRA 1986 make to tax deductions?

    • The Act reduced the number of allowable tax deductions, thereby broadening the tax base.

  4. Did TRA 1986 address corporate taxes?

    • Yes, it lowered the corporate tax rate and eliminated many tax shelters previously available to corporations.

  5. How was the standard deduction impacted by TRA 1986?

    • The standard deduction was significantly increased for all filing statuses.
  • Marginal Tax Rate: The tax rate applied to the last dollar of income earned.
  • Tax Base: The total amount of assets or income that can be taxed by the government.
  • Tax Shelters: Financial arrangements made to avoid or reduce taxes.
  • Personal Exemption: An amount that a taxpayer can deduct for themselves and dependents.
  • Alternative Minimum Tax: A parallel tax system to ensure that high-income earners pay a minimum amount of tax.

Online References

Suggested Books for Further Studies

  1. “The Tax Reform Act of 1986: A Study in the Process of Tax Reform” by Charles E. Walker
  2. “Showdown at Gucci Gulch: Lawmakers, Lobbyists, and the Unlikely Triumph of Tax Reform” by Jeffrey Birnbaum
  3. “Tax Reform in America: The Quest for Simplicity, Fairness, and Economic Growth” by Lawrence Zelenak

Fundamentals of the Tax Reform Act of 1986: Taxation Basics Quiz

### What was the primary objective of the Tax Reform Act of 1986? - [ ] To increase government deficits - [x] To ensure tax fairness among taxpayers with similar incomes - [ ] To create universal healthcare - [ ] To eliminate corporate taxes entirely > **Explanation:** The main goal was to ensure fairness by making sure individuals with the same income paid the same amount of taxes. ### What major tax rate change occurred due to TRA 1986? - [x] Top individual tax rate was reduced from 50% to 28% - [ ] Top individual tax rate was increased to 50% - [ ] Corporate tax rate was abolished - [ ] No tax rates were changed > **Explanation:** The top individual tax rate was significantly reduced, making the tax system more straightforward. ### What did TRA 1986 eliminate to broaden the tax base? - [ ] Standard deductions - [ ] Tax on dividends - [x] Many tax shelters and deductions - [ ] Social Security taxes > **Explanation:** The Act eliminated many tax shelters and deductions, thereby broadening the taxable income base. ### How did TRA 1986 impact the standard deduction? - [ ] It was decreased for all filers - [x] It was increased for all filers - [ ] It remained the same - [ ] It was eliminated > **Explanation:** The standard deduction was increased to simplify taxes and offer greater deductions. ### What was a critical impact of the Tax Reform Act of 1986 on personal exemptions? - [ ] Personal exemptions were completely removed. - [x] Personal exemptions were increased. - [ ] Personal exemptions were only provided to corporations. - [ ] Personal exemptions were capped at $1,000. > **Explanation:** Personal exemptions saw an increase, aiding taxpayers by offering a higher deductive amount. ### What sector did TRA 1986 also address heavily aside from individual taxation? - [x] Corporate tax - [ ] Estate tax - [ ] Import tariffs - [ ] State taxes > **Explanation:** The Tax Reform Act also focused on reducing corporate tax rates and eliminating many corporate tax shelters. ### How did TRA 1986 aim to treat taxpayers with the same income? - [ ] Different tax rates based on occupation - [ ] Higher taxes for corporations only - [x] Equal taxes for taxpayers with the same income - [ ] Variable taxes based on state of residence > **Explanation:** The Act aimed to ensure fairness by implementing equal taxes for those with similar income levels. ### What policy was de-emphasized in TRA 1986 for social and economic issues? - [ ] Healthcare spending - [x] Tax incentives - [ ] Defense spending - [ ] International aid > **Explanation:** The Act de-emphasized using tax incentives and relied more on taxes purely for revenue collection. ### Did TRA 1986 make the tax system simpler or more complicated? - [x] Simpler - [ ] More complicated - [ ] No significant change - [ ] Shifted complexity to states > **Explanation:** The primary purpose was to simplify the tax system by reducing exemptions and making it easier to understand. ### What economic approach was reduced by the Tax Reform Act of 1986? - [ ] Defense spending adjustments - [x] Social and economic issue tax incentives - [ ] State tax reductions - [ ] Federal loan programs > **Explanation:** The Act reduced the use of tax incentives for social and economic issues, focusing instead on straightforward revenue generation.

Thank you for studying the details of the Tax Reform Act of 1986! Keep striving to deepen your understanding of tax legislation and its impacts.

Wednesday, August 7, 2024
Tax Refund
Tax Rebate
Investment Tax Credit (ITC) January 1, 1
Professional Income vs. Trade Income January 1, 1
Proportional Tax January 1, 1
Proportional Taxation January 1, 1
Statutory Total Income January 1, 1
Tax Code January 1, 1
Tax-Deductible January 1, 1

Accounting Terms Lexicon

Discover comprehensive accounting definitions and practical insights. Empowering students and professionals with clear and concise explanations for a better understanding of financial terms.