The ECONOMIC RECOVERY TAX ACT OF 1981 (Pub.L. 97–34), also known as
the ERTA or "KEMP-ROTH TAX CUT", was a federal law enacted in the
The Act's Republican sponsors, Representative
In the year after enactment of ERTA, the deficit ballooned, which in turn, drove interest rates from around 12% to over 20%, which, in turn, drove the economy into the second dip of the 1978-82 "double dip recession" . The Dow Jones average, which had been over 1000 before enactment of ERTA, fell to 770 by September 1982. Much of the 1981 ERTA was backed out in September 1982 by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), sometimes called the largest tax increase of the post-war period. The "Reagan recovery" began within weeks of enactment of TEFRA.
* 1 Summary * 2 Accelerated Cost Recovery System * 3 Effect and controversies * 4 References * 5 External links
The Office of Tax Analysis of the
* phased-in 23% cut in individual tax rates over 3 years; 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The accelerated depreciation changes were repealed by Tax Equity and Fiscal Responsibility Act of 1982 , and the 15% interest exclusion was repealed before it took effect by the Deficit Reduction Act of 1984 . The maximum expense in calculating credit was increased from $2000 to $2400 for one child and from $4000 to $4800 for two or more kids. The credit increased from 20% or a maximum of $400 or $800 to 30% of $10,000 income or less. The 30% credit is diminished by 1% for every $2,000 of earned income up to $28000. At $28000, the credit for earned income is 20%. The amount a married taxpayer who files a join return increased under the Economic Recovery Tax Act to $125,000 from $100,000, which was allowed under the 1976 Act. A single person is limited to an exclusion of $62,500. It also increases the amount of a one time exclusion of gain realized on the sale of principal residence by a persons at least 55 years old.
ACCELERATED COST RECOVERY SYSTEM
The Accelerated Cost Recovery System (ACRS) was a major component of the ERTA and was amended in 1986 to become the Modified Accelerated cost Recovery System. The system changed the way that depreciation deductions are allowed for tax purposes. Instead of basing the depreciation deduction on an estimate of the expected useful life of assets, the assets were placed into categories: 3, 5, 10, or 15 years of life. For example, the agriculture industry saw a re-evaluation of their farming assets. Items such as automobiles and swine were given 3 year depreciation values, and things like buildings and land had a 15-year depreciation value. The idea was that there would be a rise in tax cuts due to the optimistic consideration of depreciating values. This would in turn put more cash into the pockets of business owners to promote investment and economic growth.
EFFECT AND CONTROVERSIES
The most lasting impact and significant change of the Act was the indexing of the tax code parameters for inflation. Of the nine federal tax laws between 1968 and this Act, six were tax cuts compensating for inflation driven bracket creep . Following enactment in August 1981, the first 5% of the 25% total cuts took place beginning on October 1, 1981. An additional 10% began on July 1, 1982, followed by a third decrease of 10% beginning on July 1, 1983.
As a result of ERTA and other tax acts in the 1980s, the top 10% were paying 57.2% of total income taxes by 1988, up from 48% in 1981, the bottom 50% of earners share dropping from 7.5% to 5.7% in the same period. The total share borne by middle income earners of the 50th to 95th percentiles decreased from 57.5% to the 48.7% between 1981 and 1988. Much of the increase can be attributed to the decrease in capital gains taxes, and the ongoing recession and subsequently high unemployment contributed to stagnation among other income groups until the mid-1980s. Another explanation is any such across the board tax cut removes some from the tax rolls. Those who remain pay a higher percentage of a now smaller tax pie even though they pay less in absolute taxes.
In addition to changes in marginal tax rates, the capital gains tax was reduced from 28% to 20% under ERTA. Afterwards revenue from the capital gains tax increased 50% by 1983 from $12.5 billion in 1980 to over $18 billion in 1983. In 1986, revenue from the capital gains tax rose to over $80 billion; following restoration of the rate to 28% from 20% effective 1987, capital gains revenues declined through 1991.
Critics claim that the tax cuts worsened the deficits in the budget
The non-Partisan Congressional Research Service (in the Library of Congress) issued a report in 2012, analyzing the effects of tax rates from 1945 to 2010. The CRS concluded that top tax rates have no positive effect on economic growth, saving, investment, or productivity growth; reduced top tax rates do, however, increase income inequality: The reduction in the top tax rates appears to be uncorrelated with saving, investment and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.
The cornerstone of discussing economic reform or ideology comes down to supply and demand. When looking at the demand through the idea of this Tax Act, it is apparent that those in favor were trying to give more money to people in lower tax brackets through the increased income from the top. Though this was supposed to be brought on with increased demand for goods among the lower sectors. What this actually did was put the government in a deficit situation, and the supposed increase in demand from the lower sector was one that did not play out exactly as expected. On the supply side of the spectrum, the records show that the increase in taxes did not raise the revenues of the economy, and in turn did not increase the consumerism of lower waged citizens. The idea was one that seemed promising, but the money would just start to collect at the top of the tax bracket and not be reinvested into the economy like the legislators thought.
Reagan came into office with a national debt around $900 billion.
Reagan inherited office with high unemployment rates and a public
distrust in government. The ERTA was designed to give tax breaks to
all citizens in hopes of jumpstarting the economy and helping create
more wealth in the country. By the summer of 1982, the double dip
recession, return of high interest rates, and ballooning deficity had
convinced Congress that the Act had failed to create the results that
the Reagan administration hoped. Largely at the initiative of Senate
Finance Committee chairman Robert Dole, most of the personal tax cuts
were backed out in September 1982 by the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA). When Reagan left office, the
national debt had tripled, to around $2.6 trillion. Author Monica
Prasad contends that these kinds of tax cuts became popular among
Republican candidates because the cuts were well received by voters
and could help candidates get elected. Prasad argues that such major
tax cuts are the biggest cause for the current U.S. national deficit.
Economic Recovery Tax Act of 1981
* ^ Pub.L. 97–34, 95 Stat. 172, enacted August 13, 1981)
* ^ Kessler, Glenn (10 April 2015). "Rand Paul’s claim that
Reagan’s tax cuts produced ‘more revenue’ and ‘tens of
millions of jobs’". Washington Post. Retrieved 16 October 2015.
* ^ A B Office of Tax Analysis (2003, rev. September 2006).
"Revenue Effects of Major Tax Bills" (PDF).
* Full text