Tax Bill Is Signed Into Law

August 03, 2024

President Reagan yesterday signed into law the most far-reaching overhaul of the federal income tax in more than 40 years, a bipartisan initiative given up for dead many times in the last two years.

With the U.S. Marine Band playing patriotic tunes on the White House lawn before an audience of 1,500, Reagan was so eager to put in place his chief domestic policy initiative that he signed his last name first and had to insert his first name in front of it.

"This tax bill is less a reform . . . than a revolution," Reagan said. In closing, he said: "I feel like we just played the World Series of tax reform and the American people won."

The law will cut tax rates for most individuals and companies, while repealing or curtailing many widely used deductions and credits. The result is that those with equal incomes will pay more equal taxes -- a recurring theme sounded by advocates of rewriting the tax code.

The president vowed to "oppose with all my might any attempt to raise tax rates on the American people," a statement that does not foreclose further tightening of loopholes or other revenue increases outside the income tax to reduce the budget deficit.

The top rate for individuals will fall from the current 50 percent to 38.5 percent in 1987 and 28 percent in 1988, although high-income taxpayers will face a hidden rate of 33 percent. About 80 percent of individual taxpayers will pay the bottom rate, 15 percent, in 1988. The top corporate rate will drop from 46 percent to 34 percent by 1988.

By greatly increasing the standard deduction and almost doubling the personal exemption for taxpayers and dependents, the law will remove 6 million low-income households from the income tax rolls. On average, individual income taxes will fall 1.6 percent in 1987 and 6 percent in 1988, although about 20 million of the nation's 100 million tax-paying households will face tax increases.

Most tax shelters will be abolished, as will the special low rate for capital gains -- two features that skew the current system's benefits toward the wealthy. But many middle and upper-middle income taxpayers will lose popular deductions for Individual Retirement Accounts, sales taxes and interest on credit cards, car loans and other consumer credit.

The law will increase the corporate tax burden $ 120 billion by 1991, decreasing individual taxes by the same amount. The shift will raise corporate taxes in relation to the economy to the levels of the mid-1970s, although some sectors, particularly services or high tech, will pay less.

The new law is the fourth major tax bill enacted since 1981, leading many business executives to plead as much for certainty as for tax advantages. "We must restore certainty to our tax code and our economy," Reagan said.

Flanking the president as he signed the 879-page Tax Reform Act of 1986 were Republican and Democratic lawmakers influential in bringing about its passage -- and a few who worried to the end that the dramatic changes would harm middle-class taxpayers, slow the economy and impair the ability of U.S. companies to compete abroad.

House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), the congressional leader who took the measure over its first legislative hurdles, watched intently over Reagan's right shoulder as the president signed the law with 12 pens, one for each letter of his name. Senate Finance Committee Chairman Bob Packwood (R-Ore.), who persuaded his reluctant committee members to resist entrenched opposition, stayed in Oregon to campaign for reelection.

Sen. Bill Bradley (D-N.J.), dubbed by Packwood the "godfather" of tax overhaul, was also in Oregon -- against his will. Bradley, who had been campaigning for Democratic gubernatorial hopeful Neil Goldschmidt, was fogged in at the Portland airport. He and Packwood watched the bill-signing on a special television hook-up at the Portland Marriott and later talked by telephone to Reagan.

"So that was the moment that I've waited four years for," Bradley said wistfully in a telephone news conference from Portland.

Witnesses to the signing included administration officials, members of Congress, congressional aides, business lobbyists who worked for the bill -- and some who opposed it -- and 80 members of the Bourbon County, Ky., Homemakers Club who had visited the White House earlier in the morning and were invited to stay for the festivities.

"It was great, really great to be here," said Claudia Yates of Paris, Ky., adding tersely: "We won't discuss the bill."

In contrast to the euphoria at the White House, some business leaders have expressed concern that the new law will harm the economy at a time when it is flagging. Manufacturers will lose generous tax incentives, particularly the $ 38 billion-a-year investment tax credit, and many say it will be difficult to modernize their plants.

"I think this bill will be blamed for everything, including the common cold," said Rep. Richard A. Gephardt (D-Mo.), a coauthor with Bradley of the first widely noticed congressional tax-overhaul proposal.

Minutes after Reagan signed the tax law, the American Federation of Government Employees asked the U.S. District Court here to overturn as unconstitutional a provision accelerating taxes on federal workers' pensions.Staff writer Nancy Lewis contributed to this report. THE LAW'S MAJOR PROVISIONS

In calendar 1987, rates for individuals will be 11 percent, 15 percent, 28 percent, 35 percent and 38.5 percent. In 1988, there will be statutory rates of 15 percent and 28 percent.

The personal exemption for taxpayers and dependents will be $ 1,900 in 1987, $ 1,950 in 1988, $ 2,000 in 1989 and then be indexed for inflation.

The standard deduction will increase with inflation in 1987 and then to $ 3,000 for singles, $ 5,000 for married taxpayers and $ 4,400 for single heads of household in 1988. Elderly or blind taxpayers will receive the full increase in 1987 and can take an additional $ 750 per qualified person if single, $ 600 if married.

State and local sales taxes will not be deductible. Income, real-estate and property taxes will be deductible.

Those who take the standard deduction cannot deduct charitable contributions, but itemizers can.

Deductions for interest on non-mortgage loans, such as credit-card debt or auto loans, will be phased out. Sixty-five percent can be deducted in 1987, 40 percent in 1988, 20 percent in 1989, 10 percent in 1990 and none thereafter.

Interest on loans using houses as security can be deducted if used for medical or educational expenses. Otherwise, only interest on home-equity loans of no more than the purchase price plus cost of improvements can be deducted.

Capital gains will be taxed at the same rates as income from salaries. In 1987, the rate will be capped at 28 percent.

Individual Retirement Account deductions will be fully available for all taxpayers not covered by another pension plan and for married taxpayers with adjusted gross income (AGI) of less than $ 40,000 and singles with AGI below $ 25,000. Marrieds with AGI above $ 50,000 and singles above $ 35,000 cannot take the deduction, and pro-rated deductions are permitted for those in between. All taxpayers can earn tax-deferred interest on IRA contributions.

Workers can put no more than $ 7,000 annually into tax-deferred 401(k) savings plans. A 10 percent penalty will be in effect on amounts withdrawn before retirement and, after 1988, only the employe's original contribution can be withdrawn.

Federal workers and others with similar pension plans will pay taxes on benefits immediately on retirement rather than delaying taxation for as much as three years.

A 21 percent minimum tax on individuals and 20 percent minimum tax on businesses apply to those who otherwise would pay little or no tax.

Only 80 percent of the cost of business meals and entertainment costs is deductible.

The top corporate tax rate will be 40 percent in 1987, 34 percent in 1988.

The investment tax credit of as much as 10 percent will be repealed as of last Jan. 1.

Business assets, such as equipment and real estate, generally will be written off over longer periods of time.

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