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34th Anniversary Of TRA86 Enactment – What’s Changed And Still Needed?



34th Anniversary of TRA86 Enactment - What's Changed and Still Needed?

On October 22, 1986, President Reagan signed the Tax Reform Act of 1986 (PL 99-514). Take a look at this picture at the Social Security Administration website to see a group of men from the tax committees cheerily watching the president sign the bill outside of the White House. At the time, we had a Republican president and controlled Senate and a Democrat controlled House, all working together and holding numerous hearings about the reforms).

The TRA86 lowered rates and broadened the base. Prior to TRA86, the top corporate rate was 46% and the top individual rate was 50%. Today, the top corporate rate is 21% (flat, no longer graduated) and the top individual rate is 37% (goes back to 39.6% after 2025).

The new rates:

  • Corporations: 15%, 25% and 34%
  • Individuals: 15% and 28% with capital gains taxed at the same rates

Why was there a TRA86? President Reagan wanted to lower the rates and there was bi-partisan support for a fairer, simpler tax law that would be more supportive of economic growth. There was also a desire to shut down some problem areas such as tax shelters that middle and high income individuals were investing in and get most corporations to use the accrual method of accounting and the percentage of completion method for their long-term contracts (as they would for their GAAP financial statements).

There were several extensive reports by the Treasury Department about issues with the existing system and analysis of possible reforms. See Tax Reform for Fairness, Simplicity, and Economic Growth: The Treasury Department Report to the President in 3 volumes with the third volume on a VAT.

The transmittal letter in the report included: “we believe we have followed your mandate of May 1984 to design a sweeping and comprehensive reform of the entire tax code. The Treasury Department study focused on four options: a pure flat tax, a modified flat tax, a tax on income that is consumed, and a general sales tax, including a value-added tax and retail sales taxes.”

Further: “These proposals are bold, and they will be controversial. Those who benefit from the current tax preferences that distort the use of our nation’s resources, that complicate paying taxes for all of us, and that create inequities and undermine taxpayer morale will complain loudly and seek support from every quarter. But a far greater number of Americans will benefit from the suggested rate reduction and simplification. The achievement of fundamental tax reform and the manifest benefits it would entail — will require extraordinary leadership.”

Several provisions of the TRA86 remain such as no deduction for personal interest expense and uniform capitalization rules and required use of the accrual method for large businesses. Some notable changes since TRA86:

  • Max individual rate of 28% ended with addition of 31% bracket by OBRA’90 (P.L. 101-508), effective for 1991.
  • Maximum capital gain rate remained at 28%.
  • Corporate rate raised to 35%
  • AMT preference for contributions of appreciated property was repealed by RA’93 (P.L. 103-66).
  • Base broadening slowly eroded with addition of new preferences, particularly with Taxpayer Relief Act of 1997 (P.L.  105-34).
  • Added child tax credit, Hope Scholarship credit, expanded §121 gain exclusion for residence, and repealed AMT for small corporations.
  • Numerous credits and special deductions added (§199, energy credits, and more)

After the TRA86, other countries lowered their tax rate on corporate income until the US rate became one of the higest rates until loweredto 21% by the TCJA in December 2017.

Did the TCJA of 2017 address all tax issues? No.  Here is a partial list of once still in need of addressing that have been longstanding issues.

  • Recognition of technology in tax compliance
    • Compliance system still rooted in paper, and not as technologically modern as online banking or online shopping.
    • Return-free system
      • Called for in Treasury’s 1984 report
      • GAO report Alternative Filing Systems (10/96)
      • Many countries have gov’t or employer prepare return
      • Camp’s HR 1 (2014) prohibits it – “SEC. 6103. PRE-POPULATED RETURNS PROHIBITED.”
  • Clarification of worker classification system
    • Revenue Act of 1978, Section 530 – Congress to study; added temp rules
      • 1982 – made permanent
      • Today – issues continue
  • Debt reduction and other budget issues, such as Social Security and Medicare reforms

What do you think? Annette Nellen.

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Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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