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© TAX ANALYSTS. Reprinted with permission.
Before enactment of the Tax Reform Act of 1986 (TRA86), the individual income tax code included 25 marginal tax rates. No more than 10 percent of tax filers were in a single bracket and eight brackets included less than 1 percent of filers. The top income tax bracket of 50 percent was reduced from the 70 percent in effect in 1980 and a 93 percent rate affecting the very rich in the 1960s (not shown on table).
TRA86 slashed the number of official tax brackets to two, but it also created a phantom 33 percent tax bracket or "bubble" on the tax rate schedule. Caused by the phaseout of the 15 percent bracket, its effect was to make some middle-income people face higher marginal rates than the rich.
More significantly, TRA86 cut marginal income tax rates for almost everybody. (It paid for this by closing loopholes and raising corporate income taxes.) Before 1986, only 42 percent of tax filers were in the 15 percent tax bracket or lower. After TRA86, more than threequarters of tax filers were in that category.
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