Tax History

Many people do not know the history of taxation in the US. Taxes started in about 1913 as an asset tax. When you owned property you paid tax on the value. This was about the time that the very rich started to transfer their assets to different types of trusts to avoid this tax. World War I and the crash in 1929 set the stage for extreme income tax that reached the 90 percent level in about 1946 and continued to 1964. In 1952 or about that time Ronald Reagan made a movie called "Bonzo Goes to Washington" of which Reagan made a cool 1 million dollars, however on pay day when he received his check there was $900,000 in tax withholding. Can you imagine what reaction that would create, you get a million only to pay the government $900,000 in taxes. That was when Reagan said he became a Republican and probably set the stage for him to become President. By the graph below you can see that taxes appeared to decline substantially, however, 24 of the last 25 years the so called tax freedom day has gotten further and further away. This year its close to May 18th before we, on average, stop working for the Federal and local governments. The conclusion is do you think that taxes will be higher or lower in the future? You decide. By the way, the tax cuts of Ronald Reagan were the largest tax cuts since the late 1930's.

Summary of Federal Tax Legislation Impacting Life Insurance and Annuities from 1974 to 1990.


Revenue Reconciliation Act of 1990

  • Individual, trust and estate tax rates increased.
  • Life insurer taxes raised.
  • buy--Sell agreements valuation rules changed.
  • Section 2036(c) repealed; new valuation rules enacted.
  • Excise taxes raised on defined benefit plan reversions; PBGC premiums increased.
  • Excess defined benefit pension assets may be transferred to retiree health accounts.

Revenue Reconciliation Act of 1989

  • Technical corrections to TAMRA, modified endowment contract (MEC) rules.
  • Limited certain investment--oriented second-to-die life insurance policies.
  • Repealed IRC 89; reinstated prior antidiscrimination, etc., rules of IRC 79 et al.

Tax and Miscellaneous Revenue Act of 1988 (TAMRA)

  • Revised the mortality and expense charge rules under the life insurance definition.
  • Enacted modified endowment contract definition and provided for the taxation of distributions therefrom.
  • Mandated tax treatment studies of life insurance and annuities.
  • Increased the group term life valuation for older age groups.
  • Revised 2036(c) estate freeze provisions.
  • Revised Section 89 non--discrimination and qualification rules respecting certain employee welfare plans.
  • Changed rules respecting dependent care, COBRA health care continuation, retirement plans, IRC Section 457 deferred compensation plans, etc.

Omnibus Budget Reconciliation Act of 1987 (Revenue Act of 1987)

  • Enacted IRC Section 2036(c), which restricted estate valuation freezes through corporate recapitalization, etc.
  • Enacted estate tax surcharge on large estates and extended 55% maximum estate tax bracket.
  • Established new rules for taxing personal service corporations.

Tax Reform Act of 1986

  • Amended life insurance rules definition regarding policy "forceouts." Results in certain policy distribution taxes on an interest-first basis.
  • Revised individual and corporation alternative minimum tax rules. Life insurance cash value increases and death proceeds may be taxed under the corporate rules.
  • Lowered individual and corporate tax rates.
  • Restricted tax shelters.
  • Eliminated many deductions including many kinds of loan interest (including life insurance policy loan interest) and sales tax.
  • Enacted IRC Section 89 rules.
  • Tightened benefit, discrimination, and other qualified deferred compensation plan rules.
  • Increased capital gains taxes.
  • Restricted individual retirement account (IRA) use.
  • Enacted additional qualified plan benefit and contribution plans may not stop or reduce benefit accruals and contributions because of age.
  • Established additional health care plan continuation requirements.

Deficit Reduction Act of 1984 (DEFRA)

  • Enacted life insurance company and product rules.
  • Created life insurance definitions.
  • Revised group term life insurance including RLR rules.
  • Addressed interest-free loans.
  • Enacted VEBA and cafeteria plan restrictions.
  • Extended qualified plan benefit and contribution limits.
  • Revised top heavy rules.
  • Revised 401(k) non-discrimination rules.

Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)

  • Changed annuity rules.
  • Revised group term life insurance rules.
  • Enacted universla life insurance rules.
  • Limited qualified plan contributions and benefits. And froze cost of living adjustments. Top heavy rules enacted.

Economic Recovery Tax Act of 1981 (ERTA)

  • Reduced individual tax rates and indexed brackets.
  • Allowed qualified plan participants to have IRAs.
  • Raised and revised estate and gift tax credits and deductions.

Technical Corrections Act of 1979

  • Revised SEPP, IRA, and qualified plan rules.

Revenue Act of 1978

  • Enacted IRC 401(k) plans.
  • Enacted IRC 125 programs.
  • Established SEPPs.
  • More IRA rules.
  • Eliminated tax exclusion for discriminatory uninsured medical reimbursement plans.

Tax Reform Act of 1976

  • Overhauled estate and gift tax laws.
  • Refined IRAs.

Employee Retirement Income Security Act of 1974 (ERISA)

  • Established new rules for welfare benefit plans and qualified deferred compensation plans. Rules covered eligibility, participation, benefits, contributions, funding, investments, vesting, fiduciary standards, reporting and disclosure, etc.
  • Established IRAs.

 

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