Economic Recovery Tax Act of 1981

From Wikipedia, the free encyclopedia
Jump to navigation Jump to search
Economic Recovery Tax Act of 1981
Great Seal of the United States
Long titleAn act to amend the Internal Revenue Code of 1954 to encourage economic growth through reduction of the tax rates for individual taxpayers, acceleration of the capital cost recovery of investment in plant, equipment, and real property, and incentives for savings, and for other purposes.
Acronyms (colloquial)ERTA
NicknamesKemp–Roth Tax Cut
Enacted bythe 97th United States Congress
EffectiveAugust 13, 1981
Citations
Public law97-34
Statutes at Large95 Stat. 172
Legislative history
  • Introduced in the House as H.R. 4242 by Dan Rostenkowski (D-Ill.) on July 23, 1981
  • Committee consideration by House Ways and Means,
  • Passed the House on July 29, 1981 (323–107)
  • Passed the Senate on July 31, 1981 (voice vote)
  • Reported by the joint conference committee on August 1, 1981; agreed to by the Senate on August 3, 1981 (67–8) and by the House on August 4, 1981 (282–95)
  • Signed into law by President Ronald Reagan on August 13, 1981
President Ronald Reagan signs the bill at Rancho del Cielo in 1981

The Economic Recovery Tax Act of 1981 (ERTA) was a major tax cut designed to encourage economic growth. Also known as the "Kemp–Roth Tax Cut", it was a federal law enacted by the 97th United States Congress and signed into law by President Ronald Reagan. The Accelerated Cost Recovery System (ACRS)[1] was a major component, and was amended in 1986 to become the Modified Accelerated Cost Recovery System (MACRS).[2]

Republican Congressman Jack Kemp and Republican Senator William Roth had nearly won passage of a tax cut during the presidency of Jimmy Carter, and Reagan made a major tax cut his top priority upon taking office. Though Democrats maintained a majority in the House of Representatives during the 97th Congress, Reagan was able to convince conservative Democrats like Phil Gramm to support the bill. ERTA passed Congress on August 4, 1981, and was signed into law on August 13, 1981. ERTA was one of the largest tax cuts in U.S. history,[3] and ERTA and the Tax Reform Act of 1986 are known together as the Reagan tax cuts.[4] Along with spending cuts, Reagan's tax cuts were the centerpiece of what some contemporaries described as the conservative "Reagan Revolution."

Included in the act was an across-the-board decrease in federal income tax rates. The top marginal tax rate fell from 70 percent to 50 percent, and the bottom rate dropped from 14 percent to 11 percent. To prevent future bracket creep, the new tax rates were indexed for inflation. ERTA also slashed estate taxes, capital gains taxes, and corporate taxes. Critics of the act claim that it worsened federal budget deficits, while supporters credit it for bolstering the economy during the 1980s.

Due to deficit concerns in the midst of the early 1980s recession, many of the cuts implemented by ERTA were rescinded by the Tax Equity and Fiscal Responsibility Act of 1982; the Modified Accelerated Cost Recovery System (MACRS) came in 1986.

Summary[edit]

The Office of Tax Analysis of the United States Department of the Treasury summarized the tax changes as follows:[5]

  • 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 the Accelerated Cost Recovery System (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.[6]

Legislative history[edit]

Republican Congressman Jack Kemp and Republican Senator William Roth had nearly won passage of a major tax cut during the presidency of Jimmy Carter, but President Carter had prevented passage of the bill due to concerns about the deficit.[7] Supply-side economics advocates like Kemp and Reagan asserted that cutting taxes would ultimately lead to higher government revenue due to economic growth, a proposition that was challenged by many economists.[8] Upon taking office, Reagan made the passage of Kemp-Roth bill his top domestic priority. As Democrats controlled the House of Representatives, passage of any bill would require the support of some House Democrats in addition to the support of congressional Republicans.[9] Reagan's victory in the 1980 presidential campaign had united Republicans around his leadership, while conservative Democrats like Phil Gramm of Texas (who would later switch parties) were eager to back some of Reagan's conservative policies.[10] Throughout 1981, Reagan frequently met with members of Congress, focusing especially on winning support from conservative Southern Democrats.[9] In July 1981, the Senate voted 89-11 in favor of the tax cut bill favored by Reagan, and the House subsequently approved the bill in a 238-195 vote.[11] Reagan's success in passing a major tax bill and cutting the federal budget was hailed as the "Reagan Revolution" by some reporters; one columnist wrote that the Reagan's legislative success represented the "most formidable domestic initiative any president has driven through since the Hundred Days of Franklin Roosevelt."[12]

Accelerated Cost Recovery System[edit]

The Accelerated Cost Recovery System (ACRS)[13][1] 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.[14] 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.[15] 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.[16]

Effect and controversies[edit]

The most lasting impact and significant change of the Act was indexing the tax code parameters for inflation[13] starting in 1985. Six of the nine federal tax laws between 1968 and 1981 were tax cuts compensating for inflation driven bracket creep.[5] Inflation was particularly high in the five years preceding the Act; bracket creep alone caused federal individual income tax receipts to increase from 7.94% to over 10% of GDP.[17] Even after the Act was passed, federal individual income tax receipts never fell below 8.05% of GDP; combined with indexing, this eliminated the need for future tax cuts to address it.[17]

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.[18]

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.[18] 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.[19] 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.[20]

Under ERTA, marginal tax rates dropped,[21] and capital gains tax was reduced from 28% to 20%. Revenue from capital gains tax increased 50% (from $12.5 billion in 1980 to over $18 billion in 1983).[18] 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.[18]

Critics claim that the tax cuts worsened U.S. budget deficits. Reagan supporters credit them with helping the 1980s economic expansion[22] that eventually lowered the deficits. After peaking in 1986 at $221 billion the deficit fell to $152 billion by 1989.[23] . The Office of Tax Analysis estimates that the act lowered federal income tax revenue by 13%, relative to where it would have been in the bill's absence.[24]

Canada, which had adopted indexing of income tax in the early 1970s, saw deficits at similar and even larger levels to the United States in the late 1970s and early 1980s.[25]

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:[26]

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.[27]

Tax revenue from the wealthy dropped, consumerism of lower waged citizens did not increase, and much of this increased wealth collected at the top of the tax bracket, with little reinvested into the economy.[28][13]

Reagan came into office with a national debt of around $900 billion, high unemployment rates and public distrust in government. The ERTA was designed to give tax breaks to all citizens in hopes of jumpstarting the economy and creating more wealth in the country. By the summer of 1982, the double dip recession, return of high interest rates, and ballooning deficits 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) though, most significantly, not the indexing of individual income tax rates. When Reagan left office, the national debt had tripled, to around $2.6 trillion. Sociologist 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.[29]

References[edit]

  1. ^ a b Steve Lohr (February 21, 1981). "Depreciation's effect on taxes". The New York Times.
  2. ^ "Depreciation and Amortization tax form)" (PDF). NYTimes.com.
  3. ^ Petulla, Sam; Yellin, Tal (January 30, 2018). "The biggest tax cut in history? Not quite". CNN. Retrieved April 6, 2019.
  4. ^ Kessler, Glenn (April 10, 2015). "Rand Paul's claim that Reagan's tax cuts produced 'more revenue' and 'tens of millions of jobs'". Washington Post. Retrieved October 16, 2015.
  5. ^ a b Office of Tax Analysis (2003, rev. September 2006). "Revenue Effects of Major Tax Bills" (PDF). United States Department of the Treasury. Working Paper 81, page 12. Retrieved July 18, 2009. Cite journal requires |journal= (help); Check date values in: |date= (help)
  6. ^ http://heinonline.org/HOL/Page?handle=hein.journals/aklr15&div=24&g_sent=1&collection=journals#
  7. ^ Rossinow, p. 20
  8. ^ Patterson, pp. 154-155
  9. ^ a b Leuchtenberg, pp. 599-601
  10. ^ Rossinow, pp. 48–49
  11. ^ Rossinow, pp. 61–62
  12. ^ Patterson, p. 157
  13. ^ a b c Gregg Easterbrook (June 1982). "The Myth of Oppressive Corporate Taxes". Atlantic magazine. p. 59.
  14. ^ Fullerton, Don, and Yolanda Kodrzycki Henderson, “Long-Run Effects of the Accelerated Cost Recovery System,” The Review of Economics and Statistics, vol. 67, no. 3, 1985, pp. 363–372, at [1].
  15. ^ Batte, Marvin T. “An Evaluation of the 1981 and 1982 Federal Income Tax Laws: Implications for Farm Size Structure,” North Central Journal of Agricultural Economics, vol. 7, no. 2, 1985, pp. 9–19, at [2].
  16. ^ [14].
  17. ^ a b C. Eugene Steuerle (1992). The Tax Decade: How Taxes Came to Dominate the Public Agenda. Urban Institute Press. pp. 43–44. ISBN 978-0877665229.
  18. ^ a b c d Arthur Laffer (June 1, 2004). "The Laffer Curve: Past, Present, and Future". Retrieved November 5, 2010. Cite journal requires |journal= (help)
  19. ^ Joint Economic Committee (1996). "Reagan Tax Cuts: Lessons for Tax Reform". Archived from the original on February 26, 2009. Retrieved November 5, 2010. Cite journal requires |journal= (help)
  20. ^ Congressional Budget Office (1986). "Effects of the 1981 Tax Act". Retrieved November 5, 2010. Cite journal requires |journal= (help)
  21. ^ top rates: from 70% to 50%
  22. ^ "The Reagan Expansion >The Reagan Expansion". Ronald Reagan Information Page. Archived from the original on October 23, 2008. Retrieved May 3, 2009.
  23. ^ FY 2011 Budget of the United States Government: Historic Tables. 2010. pp. 21–22. ISBN 978-0-16-084797-4.
  24. ^ Office of Tax Analysis (2003, rev. September 2006). "Revenue Effects of Major Tax Bills" (PDF). United States Department of the Treasury. Working Paper 81, page 12. Retrieved July 18, 2009. Cite journal requires |journal= (help); Check date values in: |date= (help)
  25. ^ June M. Probyn (August 23, 1981). "What Indexing Income Taxes Produced for Canada". The New York Times. Halifax, Nova Scotia. Retrieved 2018-12-04.
  26. ^ Rick Ungar, Non-Partisan Congressional Tax Report Debunks Core Conservative Economic Theory-GOP Suppresses Study, Forbes (Nov. 2, 2012) [3]
  27. ^ Congressional Research Service, Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945, [4]
  28. ^ Lawrence Lindsey (1985). "The 1982 Tax Cut: The Effect of Taxpayer Behavior on Revenue and Distribution". Proceedings of the Annual Conference on Taxation Held under the Auspices of the National Tax Association-Tax Institute of America. 78: 111–118. JSTOR 42911671.
  29. ^ Prasad, Monica (2012). "The Popular Origins of Neoliberalism in the Reagan Tax Cut of 1981". Journal of Policy History. 24 (3): 351–83. doi:10.1017/S0898030612000103.

Works cited[edit]

External links[edit]