# Economic Recovery Tax Act **The Economic Recovery Tax Act of 1981 (ERTA, P.L. 97-34)**, signed by [[Ronald Reagan]] on August 13, 1981, was the first legislative victory of [[Supply-Side Economics]]. As a share of the economy it was larger than any tax cut enacted in the following decades. It cut the top individual rate from 70% to 50% and indexed the tax code to inflation. Most of what has followed it, from the 1982 partial reversal to the [[Tax Cuts and Jobs Act]] of 2017, repeats one pattern: a large cut tilted toward the top, justified by growth projections, followed by deficits. See [[Reagan Tax Cuts]] for the wider arc. ## Lineage ERTA descends from Kemp-Roth, the 1977 bill by Rep. [[Jack Kemp]] and Sen. William Roth for a 30% across-the-board rate cut over three years. [[Jude Wanniski]] popularized the theory and economist Arthur Laffer's [[Laffer Curve]] supplied its claim that lower rates could pay for themselves. Reagan ran on Kemp-Roth in 1980. In the Democratic House the bill moved as the Conable-Hance substitute (Barber Conable and Kent Hance), carried by conservative Southern "Boll Weevil" Democrats. ## Votes | Date (1981) | Chamber | Vote | |---|---|---| | July 29 | House — Conable-Hance substitute | 238–195 | | July 29 | Senate — its version | 89–11 | | August 3 | Senate — conference report | 67–8 | | August 4 | House — conference report | 282–95 | ## What it did | Provision | Change | |---|---| | Individual rates | 5% cut Oct 1, 1981, 10% July 1, 1982, 10% July 1, 1983 (about 23% compounded; billed as 25%) | | Top rate | 70% → 50% | | Bottom rate | 14% → 11% | | Capital gains (top) | 28% → 20% | | Indexing | Brackets, exemption and standard deduction indexed to inflation from 1985, ending "bracket creep" | | Depreciation | Accelerated Cost Recovery System (ACRS) replaced the asset-depreciation-range rules | | Savings | IRAs opened to all workers, $2,000 limit | | Estate tax | Exemption raised in steps to $600,000 by 1987 | ## Revenue, deficits and the walk-back Treasury's Office of Tax Analysis estimates ERTA's cost at 2.89% of GDP, averaged over its first four years. By the Committee for a Responsible Federal Budget's 2016 comparison, no later tax cut had matched it. Deficits widened sharply as the cuts phased in during the 1981–82 recession. The [[Tax Equity and Fiscal Responsibility Act]] of September 1982 recovered about a third of the cost (0.98% of GDP). It did this mainly by repealing ERTA's scheduled speed-ups in depreciation, tightening safe-harbor leasing, and adding withholding on interest and dividends. The rate cuts and indexing survived. Reagan adviser [[Bruce Bartlett]] later called TEFRA "the largest peacetime tax increase in American history." Indexing was the sleeper provision: it quietly removed the automatic revenue growth that inflation had supplied for decades. ## Stockman's confession In "The Education of David Stockman" (*[[The Atlantic]]*, December 1981), William Greider published months of on-the-record conversations with Reagan's budget director, [[David Stockman]]. Stockman said "Kemp-Roth was always a Trojan horse to bring down the top rate" and "supply-side is 'trickle-down' theory," and admitted "none of us really understands what's going on with all these numbers." Reagan kept him on after what Stockman called a trip "to the woodshed." The article remains the founding document of the critique that supply-side was a rationale for top-rate cuts (see [[Trickle-Down Economics]]). ## See Also - [[Reagan Tax Cuts]] · [[Supply-Side Economics]] · [[Trickle-Down Economics]] · [[Laffer Curve]] · [[Starve the Beast]] - [[Ronald Reagan]] · [[David Stockman]] · [[Jack Kemp]] · [[Jude Wanniski]] · [[Federal Deficit and National Debt]] · [[Tax Cuts and Jobs Act]]