On this day 27 years ago, President Ronald Reagan signed into the law the Tax Reform Act of 1986, which stands as the last major overhaul of the US tax system. The law serves as the ultimate example in this country of tax base-broadening and tax rate-lowering reform and is often cited as the inspiration for many tax reform plans today. The Act consolidated individual income tax brackets from 15 to 2, reducing the top individual rate from 50 to 28 percent and the top corporate rate from 46 to 34 percent.
Today marks the centennial anniversary of the federal income tax, signed into law on October 3, 1913 by President Woodrow Wilson. Though this date marks the beginning of the modern income tax, there were previous iterations of income taxes in the United States, one enacted during the Civil War (which expired in 1872) and another in 1894 (ruled unconstitutional the next year).
As we explained this morning, the House of Representatives recently passed a continuing resolution funding the government at FY 2013 levels through mid-December. In order to garner support from enough House Republicans, the bill also contains three Affordable Care Act-related provisions – it delays implementation of the Affordable Care Act for a year, it includes a provision that delays for a year the requirement that insurance plans cover contraception, and it permanently repeals the medical device tax.
On Tuesday, Senator Mike Lee (R-UT) presented his Family Fairness and Opportunity Tax Reform Act, which will be introduced in the coming days.
One area of controversy in the last election was the percentage of American households that pay no federal income tax, often cited as 47 percent. The number actually peaked at 50 percent in 2009, but that proportion will fall to 43 percent this year.
The broad outlines of tax reform have always been clear. Lawmakers trim or eliminate certain tax expenditures and use some or all of the additional revenue to lower tax rates. As a general concept, most economists can agree that this approach of broadening the tax base and lowering rates will have positive economic benefits, reduce economic distortions from our tax code, and put the country on a more secure fiscal footing.
Before leaving for August recess, Senators Jack Reed (D-RI) and Richard Blumenthal (D-CT) introduced S. 1476, which would end the ability of businesses to deduct any executive salaries over $1 million. Currently, regular salaries over $1 million cannot be deducted for the five highest-paid employees, but performance-based incentives are fully deductible, per section 162(m) of the tax code.