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On This Date: Reagan's Second Round of Tax Cuts Became Law

by Countable | 10.22.17

On October 22, 1986 President Ronald Reagan signed the Tax Reform Act of 1986 into law, lowering income tax rates and consolidating tax brackets while also eliminating deductions. The legislation dramatically changed America’s tax code and is the most significant overhaul the tax code has undergone in recent decades.

The “supply-side” policies of the Reagan administration still influence the political debate surrounding U.S. economic policy, as the Republican party continues to advocate for lower rates across the board and fewer tax brackets and the Democratic party generally disagrees. With President Donald Trump in the White House and a GOP Congress, tax reform is the focus on Capitol Hill, so here's a look back at the last major overhaul of the U.S. tax code.

Why did it come up?

When Ronald Reagan ran for president in 1980, he defeated incumbent Jimmy Carter in an election that was heavily focused on economic issues. The U.S. was experiencing what’s known as “stagflation” — meaning that unemployment and inflation were both rising — and the economy wasn’t showing signs of improving.

Reagan advanced a platform that called for cutting income tax rates across-the-board while simplifying the tax code by reducing the number tax brackets. Shortly after taking office as president, he enacted his first round of tax cuts in 1981, which reduced the number of income tax brackets from 25 to 14 and lowered the top income tax rate from 70 percent to 50 percent.

By the time he ran for reelection, the American economy began to rebound and Reagan campaigned for further tax cuts, ultimately riding that momentum to a landslide victory over Walter Mondale in 1984.

What did it do?

Much of 1985 was spent drafting the tax cut package, which was introduced by (now retired) Rep. Dan Rostenkowski (D-IL). The House passed it by voice vote in December before the Senate passed an amended version in June by a 97-3 margin. After the conference committee ironed out the differences in September 1986, Congress passed the revised bill with bipartisan support in both chambers as the House approving 292-136 and the Senate following suit on a 74-23 vote.

The 1986 legislation further simplified the tax code, shrinking the number of tax brackets from 14 down to two over the course of two years. The top income tax rate fell from 50 percent to 28 percent. The rate for the lowest-income Americans rose slightly from 12 percent to 15 percent, just above the level it had been prior to Reagan’s first tax plan, but lower than the rate had been between World War II and 1964.

The bill also made significant changes to the deductions available to taxpayers. The Home Mortgage Interest Deduction was increased, allowing people to deduct interest they repay on their home mortgage loan. Meanwhile deductions for consumer loans (like credit card debt) were eliminated. There were also new restrictions placed on deductions available for business depreciation and contributions to an Individual Retirement Account (IRA).

What has its impact been?

The Reagan tax cuts remain controversial to this day. Proponents note the strength of America’s economic recovery during Reagan’s administration, when the unemployment rate fell from a high of 10.8 percent to 5.4 percent, households of virtually every type experienced wage growth, and over 16 million jobs were created. On the other hand, detractors point to a marked increase in budget deficits during Reagan’s administration and argue that the tax cuts helped fuel income inequality, as the richest Americans saw their incomes grow faster than those who earned less.

Reagan’s successor in the White House, President George H.W. Bush famously broke his “read my lips, no new taxes” pledge by raising income tax rates slightly and adding a third bracket in 1991. SInce then, the trend has been back toward higher rates and more brackets. President Clinton added two more brackets and raised the top rate to 39.6 percent from 31 percent. President George W. Bush added a single bracket but reduced the top rate to 35 percent, which was then raised back to the Clinton-era level by President Obama (who added a seventh bracket).

As for the future? The details of the tax reform bill being worked on by the Trump administration and Congress are still in flux, with the Trump administration initially proposing three brackets but GOP lawmakers talking about adding a fourth. We'll have more on the finer points of the tax reform proposal as they're released, so stay tuned!

— Eric Revell

(Photo Credit: White House Photo / Public Domain)

Countable

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(69)
  • Azrael
    10/22/2017
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    Trickle down economics I’ve been waiting since the regan era for it to trickle down to me Only thing that runs down is💩 and that is exactly what this congress is feeding us

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  • Ticktock
    10/22/2017
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    Tax cuts for the rich did not work for the middle class or poor during Reagan’s era and it will not today. Growth in the economy does not occur when tax cuts are given to the rich. The gap between the rich and the rest of us accelerated as direct result of those cuts and been exasperated with each Republican tax cut for the rich since. Trickle down economics do not work. Rather than believe the Republican pundits look and listen to more. Simply put if more money goes to the rich what will they do? Run out to spend it, no. They have the resources now to purchase what they want or need. They will save or invest in stocks and contrary to common belief that does not increase the standard of living for the middle class or poor nor does that improve the economy. Example: during the Great Recession after the initial drop the stock market recovered during the Recession but the middle class nor the poor did the rich reaped the rewards from the growth in stocks. Give the tax cuts to the middle class and poor who will use the additional funds for day to day living. That will grow the economy and raise the standard of living.

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  • Dave
    10/22/2017
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    So marked the slow destruction of the middle class in America as our nation's wealth became conslidated amongst the ruling elites. Why so many Americans are still buying the Supply-Side Lie remains a mystery to me and every honest economist alive. We have a global economy folks... Hello?

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  • Deirdre
    10/22/2017
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    Trickle down economics does not work. It only benefits the rich

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  • Donald
    10/22/2017
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    And we’ve had decades of proof now that implementation of trickle down does not work...The wealthy get richer and the middle class has disappeared... Pure delusional Conservative policies...

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  • Michael
    10/22/2017
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    The "detractors" LIE: #1. The tax cuts were not the cause of the increase in the yearly deficits. If you compare tax revenue, you will see it rose from 500 billion to over 900 billion by the time he left office. The JFK tax cuts, the Regan tax cuts, the Clinton tax cuts, all of them lead to increases in government tax revenue. The deficit rose because Regan spent a lot of money, not because of the tax cuts. #2. It lead to over 20 million 'full time' jobs, not 16 million. #3. The middle class became wealthier during the Regan era, and many of them moved up out of the middle class, minority income moved up under Regan as well. Income inequality did rise, but income inequality is only a problem for Marxist. Income inequality rises when people are free to pursue their own goals, and are able to use their individual abilities and keep the fruits of THEIR own labor. Inequality is only a problem when you don't believe in freedom. #4. The Regan economy and his philosophy of limited government fueled the way for entrepreneurs unfettered by government to create a path for the technology boom and innovation that came out of people's garages in the 1990's. Everyone, even the poor benefited from these innovations in technology and the upward mobility that came out of his economy, though different groups of people benefited at different rates. To make the claim that only "the rich" benefited, shows vast economic ignorance.

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  • Robert
    10/22/2017
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    We should not lower taxes for the wealthy. Trickle down economics doesn't work. Rich people got that way by hoarding their money. Poor people spend theirs. If you want to grow the economy, raise the minimum wage and watch demand rev things up.

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  • Christopher
    10/22/2017
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    I lived through the high and low of the Reaganomics or ‘Voodoo Economics’ as someone used to say. This Administration is lining their pockets and the kickback to the wealthy will be staggering in contrast to the middle and poor class in terms of economic benefits. We use the term oligarchs in definition of Russian Tycoons who dominate Russian industry and economic wealth; we too are headed for the same; and there is no such thing as a benevolent dictatorship.

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  • Christine
    10/22/2017
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    Trickle down economics does NOT work. I was there then, I am here now. It does NOT work.

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  • SEHaase
    10/22/2017
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    Cut the entitlements and handouts for people who don’t even belong in this country, stop subsidizing 3rd world misery and you’ll find less tax rebellion.

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  • John
    10/22/2017
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    “Trickle Down” economics has been proven to be a completely false principle. It has failed at both the State and Federal level more than once. Why the premise of allowing the Wealthy to keep even more of their wealth ever gained political traction is Conservative Con-artistry at its Finest...Wake Up!

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  • Jeanne
    10/22/2017
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    The republicans and their ponzei schemes aka as trickle down bull. The only thing that trickles down to the public is the garbage they keep feeding us like, oh we cannot have this or that because I was elected to cut government spending but I'll be happy to cut taxes for the rich, give wealthy businesses multiple billion dollar tax breaks and call it something fancy but it's all just made up nonsense that never adds up to anything but hardship for women and the less advantaged.

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  • Dean
    10/22/2017
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    Reagan screwed the middle class! Trickle down economics are a misnomer for tax cuts for the wealthy and corporations. We need robust taxation for the elite class and multi-national corporations!

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  • Matt
    10/22/2017
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    Tax cuts should only happen if we have a surplus.

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  • D
    10/22/2017
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    Reagan raised payroll taxes & social security taxes 11 times during his residency. Trickle down ONLY works if you are a trickler, it doesn't work for those being trickled on

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  • AmericanPride
    10/22/2017
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    Tax cuts boost the economy by putting more money into working American’s pockets. That means more money is poured into the economy at the grass roots level. At the end of the day, they NEED us! Give Americans the money the slave week in and week out to earn. We’ll see the economy take off and pass the moon.

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  • I.Got.an.Idea...
    10/22/2017
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    Putting America into a recession.....

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  • M
    10/22/2017
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    Reagan’s tax cuts put us on a 30 year economic boom until Obama became president.

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  • GatewayJohn
    10/22/2017
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    Supply and demand analysis is critical to the study of economics, but should not be the driving force in tax legislation Equability, “ fair share” and closing corporate loopholes is key to taxation. Viewed from an infrastructure “use” approach it is probable that most corporations are “under-taxed “ at current rates. All fines such as for pollution should be increased and based on company income If abuse continues executives should face jail time in addition to personal fines prorated to pre tax income

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  • Larry
    10/22/2017
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    Middle class is still waiting to see the trickle down benefits promised by President Reagan. That was not a lie was it? A President of the United States of America would not lie to the people would they?

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