type: timeline_event On October 22, 1986, President Reagan signed the Tax Reform Act of 1986, the centerpiece of his second term domestic agenda. The legislation dramatically lowered the top individual income tax rate from 50% to 28% - the largest single drop in the history of the federal income tax - while reducing the corporate tax rate from 50% to 35%.
The legislative process demonstrated corporate lobbying power at its peak. The hallway outside the Senate Finance Committee became known as "Gucci Gulch" due to the swarms of well-dressed corporate lobbyists who lined up to influence tax provisions. Members of Congress were buttressed by arguments and campaign donations from these lobbyists, who secured special provisions deep in the Internal Revenue Code that would allow corporations to further reduce their tax burden.
The benefits were distributed in starkly unequal fashion. IRS data showed that taxpayers earning up to $40,000 received an average tax cut of just $603 per year, while upper-income Americans earning $500,000 to $1 million took home an average of $73,617 annually - more than 120 times larger.
The Tax Reform Act gave Reagan the significantly lower tax rates he had sought ever since confronting tax rates over 90% as a Hollywood movie star in the 1950s. The legislation established a template for decades of subsequent tax cuts that systematically transferred wealth from working and middle-class Americans to wealthy individuals and corporations.
Corporate lobbyists successfully exploited the dense thicket of the Internal Revenue Code to create loopholes and carveouts that reduced effective corporate tax rates even below the nominal 35% rate. The bipartisan passage of the legislation demonstrated how both parties had surrendered to America's wealthiest interests, implementing a tax structure that would accelerate inequality and starve government of revenue needed for public services.
The 1986 Tax Reform Act represented a major victory in the corporate capture project outlined in the Powell Memo, using the tax code as a wealth transfer mechanism while claiming to simplify and rationalize the system.