In the last 50 years, the American tax code has seen several significant reforms that have shaped the current system. These reforms have aimed at achieving various policy goals, including stimulating economic growth, promoting equity, and simplifying the tax code. Here are some of the major tax reforms and their impacts:
- Tax Reform Act of 1986: One of the most comprehensive tax reform efforts was the Tax Reform Act of 1986 during Ronald Reagan’s presidency. The Act significantly simplified the tax code by reducing the number of tax brackets from fifteen to two, set at 15% and 28%. It eliminated many deductions and loopholes, reducing the top corporate tax rate from 46% to 34%. It also expanded the personal exemption and standard deduction. However, over time, many of the loopholes and deductions have gradually crept back into the tax code.
- Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA): Signed by President George W. Bush, EGTRRA enacted significant tax cuts, including a gradual reduction of individual tax rates, phased-out estate tax, expansion of retirement plan provisions, and increased child tax credit. The policy was initially planned to expire in 2010, but several elements were temporarily extended.
- Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA): Also under President Bush, this Act further cut taxes, primarily by reducing tax rates on dividends and capital gains to a maximum of 15%.
- The American Taxpayer Relief Act of 2012 (ATRA) was enacted on January 2, 2013, to address the “fiscal cliff,” a term used to refer to a combination of the expiration of the Bush tax cuts and the implementation of across-the-board government spending cuts under the Budget Control Act of 2011, both of which were set to take effect at the end of 2012.
- Key Provisions of the American Taxpayer Relief Act of 2012
- Permanent Extension of Bush Tax Cuts for Most Americans: The ATRA made the Bush-era tax cuts permanent for most taxpayers, meaning that tax rates remained at 10%, 15%, 25%, 28%, 33%, and 35% for individuals earning up to $400,000 and couples earning up to $450,000. For incomes above these thresholds, the tax rate increased from 35% to 39.6%.
- Changes to Capital Gains and Dividends Taxes: For individuals earning over $400,000 and couples over $450,000, the rate on capital gains and dividends rose from 15% to 20%. For those below these income thresholds, the tax rate remained at 15%.
- Estate Tax: The ATRA permanently set the estate tax exclusion at $5 million (adjusted annually for inflation) but increased the top estate tax rate from 35% to 40%.
- Permanent Alternative Minimum Tax (AMT) Patch: The Act also permanently patched the Alternative Minimum Tax by increasing the exemption amounts and allowing nonrefundable personal credits to the full amount of the individual’s regular tax and AMT. This change was retroactive for tax years beginning after 2011.
- Extension of Unemployment Insurance: Emergency unemployment benefits were extended for another year, benefiting those unemployed for longer than 26 weeks.
- Other Tax Extenders: The Act extended a range of individual, business, and energy tax provisions, such as the American Opportunity Tax Credit for education, the enhanced Child Tax Credit, and the enhanced Earned Income Tax Credit.
- Effects of the American Taxpayer Relief Act of 2012
- The ATRA had significant implications for federal tax policy. By making the majority of the Bush-era tax cuts permanent, it brought some degree of stability and certainty to the tax code. The increases in the tax rates for high earners marked the first time income tax rates had risen in the United States since 1993.
- However, it also contributed to increased complexity in the tax code, especially with the adjustments to the Alternative Minimum Tax and various tax extenders. Further, it was critiqued for not addressing long-term budget issues, like entitlement reform or a broader tax reform.
- In conclusion, the American Taxpayer Relief Act of 2012 was a key piece of legislation that averted the immediate threat of the “fiscal cliff” but left many longer-term fiscal issues unresolved.
- Tax Cuts and Jobs Act of 2017 (TCJA): The most significant tax legislation since 1986, the TCJA, under President Trump, permanently cut the corporate tax rate to 21%, temporarily cut individual tax rates, nearly doubled the standard deduction, and capped state and local tax deductions. While it simplified tax filing for many people, it has been criticized for being disproportionately beneficial to corporations and high-income individuals.
These tax reforms have had varying impacts on the economy, government revenue, and the distribution of tax burdens. While some have aimed at simplifying the tax code, others have added complexity. The effects on economic growth are still debated among economists. The tax code as it stands today is a reflection of these numerous changes and is likely to continue evolving as policymakers grapple with issues of equity, efficiency, and fiscal responsibility.
