Major Examples of Tax Reform From History

Tax reform is a fundamental restructuring of a country’s tax laws, going beyond routine annual adjustments to alter how government revenue is collected. The motivations for these changes are varied, often reflecting the prevailing economic conditions and political philosophies of the era.

A primary goal of many tax reforms is to stimulate economic activity by lowering tax rates for individuals and corporations. The theory is that leaving more money in private hands will boost consumer spending and business investment. Another common objective is simplification, as tax codes can become complex over time, filled with deductions and credits that are burdensome for taxpayers to navigate.

Reforms may also seek to enhance fairness. For some, fairness means a more progressive tax system, where higher earners pay a larger percentage of their income in taxes. For others, it means treating all forms of income similarly to prevent taxpayers from sheltering their earnings. Tax reform is a tool governments use to pursue economic and social objectives, balancing the need for revenue with the desire for a strong and equitable economy.

The Revenue Act of 1964

The Revenue Act of 1964, often called the Kennedy-Johnson tax cut, was legislation driven by the goal of economic stimulation. In the early 1960s, the U.S. economy was experiencing sluggish growth and high unemployment. Influenced by John Maynard Keynes, President John F. Kennedy proposed the tax cut, arguing it would spur consumer spending and business investment, leading to higher growth.

The act included a significant, across-the-board reduction in income tax rates. For individuals, the top marginal tax rate was cut from 91% to 70%. The lower-end rates were also reduced, with the bottom bracket dropping from 20% to 14% over two years. This relief was designed to increase the disposable income of nearly all taxpayers.

On the corporate side, the top tax rate was reduced from 52% to 48%. A provision aimed at helping small businesses lowered the rate on the first $25,000 of corporate income from 30% to 22%. The theory was that businesses with a lower tax burden would invest in new equipment, expand operations, and hire more workers. The act also included an investment tax credit to incentivize new capital expenditures.

The 1964 act was a shift in fiscal policy, as it was one of the first times the government used tax reduction as its primary tool to manage the economy, rather than relying on direct government spending. By leaving more capital with consumers and businesses, policymakers believed they could create a cycle of spending, investment, and job creation. The subsequent years saw a decrease in unemployment and strong economic growth, leading many to view the act as a success.

The Tax Reform Act of 1986

The Tax Reform Act of 1986 was a bipartisan effort driven by simplification, fairness, and economic neutrality. Unlike reforms aimed at cutting taxes, the 1986 act was designed to be “revenue neutral,” meaning it was not intended to change the total amount of tax collected. Its purpose was to restructure the system by following a philosophy of “broaden the base, lower the rates.”

A central feature was the consolidation of the individual income tax structure. It replaced a system with fifteen tax brackets and a top rate of 50% with a simpler structure of two rates: 15% and 28%. To offset the lower rates, the reform broadened the tax base by eliminating or curtailing many popular deductions and tax shelters.

Notable deductions eliminated included state and local sales taxes and consumer interest on car loans and credit card debt, while the deduction for home mortgage interest was preserved. It also removed the preferential treatment for long-term capital gains, mandating they be taxed at the same rate as ordinary income to treat all income sources more equally.

The act increased the standard deduction and the personal exemption, which removed millions of low-income households from the federal income tax rolls. For businesses, the top corporate tax rate was reduced from 46% to 34%, but this was paid for by eliminating various investment tax credits and depreciation preferences. The goal was to create a system where economic decisions were driven by market forces rather than tax considerations.

The Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act of 2017 (TCJA) was the most significant overhaul of the U.S. tax code in over three decades. Its focus was restructuring corporate taxation, coupled with temporary changes for individual taxpayers. The stated goals were to make American businesses more competitive globally, stimulate economic growth, and simplify tax filing for individuals.

The centerpiece of the TCJA was the permanent reduction of the corporate income tax rate. The act cut the top federal corporate rate from a tiered system as high as 35% to a flat 21%. This change addressed concerns that the previous U.S. rate encouraged companies to move profits overseas. The TCJA also moved the U.S. from a “worldwide” tax system to a “territorial” system that largely exempts foreign profits of U.S. companies from U.S. tax.

For individuals, the TCJA brought temporary changes scheduled to expire after 2025. It retained the seven-bracket structure but lowered the rates for most brackets, with the top rate falling from 39.6% to 37%. The act significantly increased the standard deduction, which for 2025 is $15,000 for single filers and $30,000 for married couples filing jointly. This led to more households claiming the standard deduction rather than itemizing.

This increase in the standard deduction was paired with new limitations on itemized deductions. The most impactful was the $10,000 cap on the deduction for state and local taxes (SALT), which includes property, income, and sales taxes. This provision affected taxpayers in high-tax states. The act also introduced a new 20% deduction for qualified business income from “pass-through” entities like partnerships and S corporations to provide tax relief to small businesses.

Global Tax Reform Initiatives

Tax reform is a global phenomenon as nations adapt their systems to changing economic realities. One widespread reform has been the adoption of a Value-Added Tax (VAT), a tax on consumption collected at each stage of the production and distribution chain. Unlike a sales tax collected at the final point of sale, a VAT is embedded in the price of goods and services, with businesses receiving credits for taxes paid on their inputs. This structure is used by more than 170 countries to raise revenue.

A more recent example is the initiative by the Organisation for Economic Co-operation and Development (OECD) and the G20 to establish a global minimum corporate tax. This effort aims to address tax avoidance strategies used by large multinational corporations, a practice known as base erosion and profit shifting (BEPS). Through BEPS, companies shift reported profits from high-tax jurisdictions to low-tax jurisdictions, reducing their overall tax liability.

The agreement, backed by over 130 countries, establishes a global minimum corporate tax rate of 15%. Under this framework, if a company’s profits in a country are taxed at a rate below 15%, its home country can apply a “top-up tax” to collect the difference. The goal is to reduce the incentive for companies to shift profits to tax havens and to curb the “race to the bottom,” where countries compete by offering lower corporate tax rates.