Economic Recovery Tax Act of 1981 (ERTA)

What Was the Economic Recovery Tax Act of 1981?

The Economic Recovery Tax Act of 1981 (ERTA) was the biggest tax cut in U.S. history. Endorsed by President Ronald Reagan around six months after he got down to business, ERTA sliced the top income tax rate and considered quicker expensing of depreciable assets. It included incentives for small business and retirement savings, and laid out inflation indexing of tax brackets.

Understanding the Economic Recovery Tax Act of 1981

ERTA was otherwise called the Kemp-Roth tax cut after its Republican patrons, Representative Jack Kemp of New York and Senator William V. Roth of Delaware. The greatest tax cuts were for wealthy Americans, with the top rate cut from 70% to half north of three years. The base bracket was cut from 14% to 11%.

Besides tax cuts and accelerated depreciation deductions, different highlights of the legislation included more straightforward rules for laying out employee stock ownership plans (ESOP); expanded qualification for Individual Retirement Accounts (IRAs); a reduction in the capital-gains tax from 28% to 20%; and a higher domain tax exemption. The indexing of tax brackets was a key provision given the period's twofold digit annual inflation, which was pushing even lower-and working class families into higher brackets.

ERTA Inspired By Supply-Side Economics

The bill was motivated by supply-side speculations of economics advanced by economist and Reagan adviser Arthur Laffer. The essential thought was that cutting taxes on the wealthy would spike more capital investment and innovation, with the benefits "trickling down" to average residents through job growth and increased consumer spending. In return, tax revenues would rise as the economy blast.

In any case, ERTA didn't quickly jumpstart the economy as advocates expected. Business capital investment stayed weak, unemployment remained high, and consumer spending didn't increase. In the mean time, in the year after the bill's section, the federal deficit spiked due to the uncommon decline in tax revenue.

Congress Blunts ERTA a Year Later

When ERTA became law, the final part of the "two-fer" recession was beginning in the U.S., mostly in light of the fact that Federal Reserve Chair Paul not entirely set in stone to subdue inflation, with the benchmark interest rate as high as 20%. With the economy failing and tax revenue sinking, the U.S. deficit started to take off. A frightened Congress answered by switching a portion of the provisions in the ERTA in September of 1982 with the Tax Equity and Fiscal Responsibility Act, drove by Senate Finance Committee chair Robert Dole. Recovery started very quickly.

The ERTA stays questionable. Growth bounced back in the mid-and late 1980s, and advocates refered to the tax cuts, claiming they eventually raised tax revenues by 6%. Despite the fact that it is probably not going to be the last word, in 2012 the non-hardliner Congressional Research Service examined tax rates and their economic effects from 1940 to 2010 and presumed that bringing down top tax rates significantly affects economic growth or productivity, however adds to greater wealth inequality. Under Reagan, the U.S. national debt significantly increased to $2.6 trillion.

Highlights

• The ERTA sliced the highest income tax bracket from 70% to half.
• Combined with increased military spending, the ERTA contributed to taking off U.S. public debt, which significantly increased in Reagan's time in office.
• Endorsed by Ronald Reagan during his most memorable year in office, the Economic Recovery Tax Act of 1981 was the biggest tax cut in U.S. history.