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The Tax Reform Act Of 1986

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The corporate income tax is one of the most poorly understood methods by which the U.S. government collects money. Corporate profits were first taxed in 1909, when Congress enacted a 1 percent tax on corporation income. The rate rose to 12.5 percent a decade later, and progressive rates that increase with income were added in 1932. Surtaxes on corporate income were added for “excess profits” and “war profits” during both world wars. The highest peacetime rate, 52.8 percent, was reached in the 1960s. The Tax Reform Act of 1986 was designed to increase the share of federal revenues collected via the corporate income tax and to decrease the share from the individual income tax. While the top corporate tax rate, like the individual rate, was cut to 34 percent deductions for capital expenditures were severely curtailed and the investment tax credit was repealed. As a result, the effective tax rate for many corporations rose. Many people see the 1986 Tax Reform Act as a model for comprehensive tax reform. This bipartisan legislation was able to achieve revenue by balancing rate reductions for both individuals and corporations with ending many tax preferences. The result was perceived as a simpler and economically efficient tax code.
It is confusing who actually bears the burden of the corporate income tax. Ordinary people believe, incorrectly, that it is paid by corporations, while owners and managers of corporations often assume, just as incorrectly, that the tax is
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