Tax Reform Act of 1986

Key provisions

The law reduced the number of individual tax brackets and lowered top marginal rates while also cutting the top corporate rate. To offset lower rates, it removed or curtailed many deductions, preferences and targeted tax shelters. Important elements included stronger limits on passive loss deductions (which affected tax-sheltered real estate investments), changes to capital gains treatment, and measures to reduce avoidance through tax-preference items.

Major changes (summary)

• Lowered individual and corporate marginal tax rates and consolidated tax brackets.
• Broadened the tax base by eliminating many deductions, exclusions and credits.
• Restricted common tax shelters, particularly in real estate and certain investment vehicles.
• Adjusted rules affecting capital gains and business taxation to reduce preferential treatment.

History and enactment

The Act emerged from bipartisan negotiations in the mid-1980s between the Reagan administration and Congressional leaders who sought revenue-neutral tax reform: lower rates financed by a broader base. After extensive committee work and compromise in both houses, Congress passed the bill and the president signed it into law in October 1986.

Effects and legacy

Supporters say the reform simplified filing, made the system fairer by reducing loopholes, and improved economic efficiency; critics note distributional effects, transitional disruptions, and complexity in some new rules. The 1986 reform influenced later tax policy debates and remains a key reference point in discussions about rate cuts combined with base broadening.