Economic Recovery Tax Act of 1981

Representative Jack Kemp and Senator William Roth, both Republicans, had nearly won passage of a tax cut during the Carter presidency, but President Jimmy Carter feared an increase in the deficit and so prevented the bill's passage. Reagan made a major tax cut his top priority once he had taken office. The Democrats maintained a majority in the US House of Representatives during the 97th Congress, but Reagan convinced conservative Democrats like Phil Gramm to support the bill. The Act passed the US Congress on August 4, 1981, and it was signed into law by Reagan on August 13, 1981. It was one of the largest tax cuts in US 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 the rates of federal income tax. The highest marginal tax rate fell from 70% to 50%, the lowest marginal rate from 14% to 11%. To prevent future bracket creep, the new tax rates were indexed for inflation. Also reduced were estate taxes, capital gains taxes, and corporate taxes.


Critics of the act claim that it worsened federal budget deficits, but supporters credit it for bolstering the economy during the 1980s. Supply-siders argued that the tax cuts would increase tax revenues. However, tax revenues declined relative to a baseline without the cuts because of the tax cuts, and the fiscal deficit ballooned during the Reagan presidency.^{[5][6][7][8][9][10][11]}


Much of the 1981 Act was reversed in September 1982 by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), which is sometimes called the largest tax increase of the postwar period.

Legislative history[edit]

Representative Jack Kemp and Senator William Roth, both Republicans, had nearly won passage of a major tax cut during the Carter presidency, but President Jimmy Carter prevented the bill from passing out of concern about the deficit.^[14] Advocates of supply-side economics like Kemp and Reagan asserted that cutting taxes would ultimately lead to higher government revenue because of economic growth, a proposition that was challenged by many economists.^[15]


Upon taking office, Reagan made the passage of the bill his top domestic priority. As Democrats controlled the House of Representatives, the passage of any bill would require the support of some House Democrats in addition to that of Republicans.^[16] Reagan's victory in the 1980 presidential campaign had united Republicans around his leadership, and conservative Democrats like Phil Gramm of Texas (who would later switch parties) were eager to back some of Reagan's conservative policies.^[17]


Throughout 1981, Reagan frequently met with members of Congress and focused especially on winning the support from conservative Southern Democrats.^[16] In July 1981, the Senate voted 89–11 for the tax cut bill favored by Reagan, and the House approved the bill in a 238–195 vote.^[18] 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 Reagan's legislative success represented the "most formidable domestic initiative any president has driven through since the Hundred Days of Franklin Roosevelt."^[19]