Tax reform can feel like rearranging the furniture in a house where everyone has strong opinions. But sometimes, a bold redesign is exactly what’s needed to create a fairer, more efficient system. In 1986, the United States did just that, enacting a sweeping overhaul that still shapes global tax debates today. As Australia faces mounting calls for its own reforms in 2025, the Tax Reform Act of 1986 offers a playbook—and a cautionary tale—worth revisiting.
The Tax Reform Act of 1986 (TRA86) was one of the most ambitious tax reforms in US history. Signed by President Ronald Reagan, it slashed the top individual income tax rate from 50% to 28%, broadened the tax base by eliminating dozens of deductions and loopholes, and simplified the tax code. Corporate rates also dropped from 46% to 34%, while a raft of business tax shelters were swept away.
TRA86 was designed to be ‘revenue neutral’—meaning the government didn’t collect more or less tax overall. Instead, it shifted the burden, aiming for fairness and simplicity. The reform was bipartisan, driven by a coalition of strange bedfellows: supply-siders, progressives, and policy wonks who saw loophole-closing as a route to equity.
Initially, the Act delivered on many promises. The US tax code became simpler for most households, and the distribution of tax burdens tilted more toward high-income earners and profitable corporations. The flattening of rates and closing of loopholes helped curb tax avoidance schemes that had flourished in the ’80s.
However, the simplicity didn’t last. Over the decades, Congress gradually reintroduced complexity through new deductions and credits. By 2025, the US tax code once again rivals Australia’s for complexity.
Still, the 1986 reform’s legacy is profound:
Australia faces its own tax crossroads. The 2025 Federal Budget has reignited debate about the balance between direct and indirect taxes, bracket creep, and the fairness of concessions on superannuation, negative gearing, and capital gains. The Tax Reform Act of 1986 offers several lessons:
Recent commentary from the Productivity Commission and Grattan Institute echoes these themes, arguing that genuine reform must tackle housing tax concessions, GST base expansion, and bracket creep head-on. With wage growth and productivity in the spotlight for 2025, the debate is only heating up.
The Tax Reform Act of 1986 was a watershed moment, proving that even the most entrenched systems can be overhauled with political courage and public support. As Australia eyes its own tax reset, the lessons of 1986—boldness, bipartisanship, and relentless focus on fairness—are more relevant than ever. The question is whether our leaders will seize the moment or let another decade slip by under the weight of complexity and special interests.