The Unintended Consequences of the Tax Reform Act of 1986
by Linda Postorivo
What's Hot: Wham,
Madonna, Frankie Goes to Hollywood, E.T.
the Extra-Terrestrial, Raiders of the Lost Ark, The
Chicago Bears, TAX
Life was good...and then, TRA 86 (Tax Reform Act of
1986). It all came to a screeching
halt. TRA 86 was given impetus by a
detailed tax-simplification proposal from President Reagan's Treasury
The top tax rate was lowered from 50% to 28% while the
bottom rate was raised from 11% to 15%, and tax brackets were consolidated from
fifteen to four levels of income. This
would be the only time in our history when the top rate was reduced and the
bottom rate increased. Capital gains faced
the same tax rate as ordinary income and corporate tax rates increased. Until 2013, TRA 86 was the most recent major
simplification of the tax code, which drastically reduced deductions as well as
the number of tax brackets.
The "Reagan tax cuts" most notably took aim at eliminating
many tax shelters as well as other preferences thought to benefit wealthy
individuals. Prior to this tax reform,
many investors taxed at the highest rates invested in limited partnerships in
various areas such as commercial and residential real estate, oil & gas
exploration and drilling, public storage facilities, cable television systems,
movie productions, airplanes, etc. Their
investments would not only fund these endeavors and provide growth for these
industries, but also provide 2:1 or 3:1 tax write-offs for the investors.
TRA 86 changed all this.
Once the tax advantages disappeared, so did the funding of the
investments since passive investors had provided much of it. The domino effect caused an implosion in the
real estate market. Since mortgage loans
constituted a significant portion of S&Ls' asset portfolios, significant
declines in the market value of real properties resulted in the erosion of the
value of these institutions' major assets and contributed to the savings and
loan crisis that took many years to resolve.
We are once again facing new tax changes. No one knows what the long-term consequences
will be. The most important thing you
can do as a responsible investor is to prepare yourself and your portfolio for
multiple scenarios. Working with a
highly qualified Investment Advisor is where you should begin. We've seen the landscape in Washington change many times. Although we can make ourselves heard through
the voting process, out best advice is to be proactive rather than reactive
Talk to your Investment Advisor. Map out a plan. Take control.