Economic Recovery Tax Act of 1981
The Economic Recovery Tax Act of 1981 (also known as the ERTA or "Kemp-Roth tax cut") was a federal law enacted in the United States in 1981. It was an Act "to amend the Internal Revenue Code of 1954 to encourage economic growth through reductions in individual income tax rates, the expensing of depreciable property, incentives for small businesses, and incentives for savings, and for other purposes"[1].
The Act also reduced the marginal income tax rates in the U.S. by 25% over three years (the top rate falling from 70% to 50% while the bottom rate dropped from 14% to 11%) and indexed the rates for inflation, though the indexing was delayed until 1985.
The Act's sponsors, Representative Jack Kemp of New York and Senator William V. Roth, Jr. of Delaware, had hoped for more significant tax cuts, but settled on this bill after a great debate in Congress. It passed Congress on August 4, 1981 and was signed into law on August 13, 1981 by President Ronald Reagan at Rancho del Cielo, his California ranch.
[edit] Summary of provisions
The Office of Tax Analysis of the United States Department of the Treasury summarized the tax changes as follows[2]:
- phased-in 23% cut in individual tax rates; top rate dropped from 70% to 50%
- accelerated depreciation deductions; replaced depreciation system with ACRS
- indexed individual income tax parameters (beginning in 1985)
- created 10% exclusion on income for two-earner married couples ($3,000 cap)
- phased-in increase in estate tax exemption from $175,625 to $600,000 in 1987
- reduced Windfall Profit taxes
- allowed all working taxpayers to establish IRAs
- expanded provisions for employee stock ownership plans (ESOPs)
- replaced $200 interest exclusion with 15% net interest exclusion ($900 cap) (begin in 1985)
The accelerated depreciation changes were repealed by Tax Equity and Fiscal Responsibility Act of 1982 and the 15% interest exclusion repealed before it took effect by the Deficit Reduction Act of 1984.
[edit] Effect and controversies
The most lasting impact and significant change of the Act was the indexing of the tax code parameters for inflation. Of nine federal tax laws between 1968 and this Act, six were tax cuts compensating for inflation driven bracket creep.[2] The elimination of bracket creep tax increases, combined with the other tax cut provisions of this bill, caused nine of the subsequent eleven tax bills through 1993 increasing taxes.
Critics claim the tax cuts worsened the deficits in the budget of the United States government. Reagan supporters credit them with helping the 1980s economic expansion[3] that eventually lowered the deficits; although a review of the actual deficit shows there was no decrease[4]. Supporters of the tax cuts also argue, using the Laffer curve, that the tax cuts increased government revenue. This is hotly disputed—critics contend that, although government income tax receipts did rise, it was due to - arguably Keynesian - economic growth, and not caused by the tax cuts, and would have risen more if the tax cuts had not occurred. Supporters see the growth as caused by the tax cuts. Controversy still remains as to whether the tax cuts of 1981 increased revenues.[citation needed]
[edit] References
- ^ Pub.L. 97-34, 95 Stat. 172, enacted August 13, 1981)
- ^ a b Office of Tax Analysis (2003, rev. September 2006) (PDF). Revenue Effects of Major Tax Bills. United States Department of the Treasury. Working Paper 81, page 12. http://www.ustreas.gov/offices/tax-policy/library/ota81.pdf. Retrieved 2009-07-18.
- ^ "The Reagan Expansion >The Reagan Expansion". Ronald Reagan Information Page. http://www.presidentreagan.info/expansion.cfm. Retrieved 2009-05-03.
- ^ "Historical Debt Outstanding - Annual 1950 - 1999". The CBO. http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo4.htm. Retrieved 2010-09-05.
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