On August 13, President Ronald Reagan signed the Economic Recovery Tax Act of 1981 (ERTA). This multifaceted tax reform package is regarded as a watershed moment in the history federal taxation.
During his presidential campaign Reagan argued that providing incentives for individuals and businesses was the best way to revitalize and grow the economy. Signing the ERTA in his first year in office made good on that promise.
The focal point of the original legislation proposed by the Administration was a 30 percent reduction in individual taxes over three years. The final piece of legislation, however, resulted in an across-the-board rate reduction and much more. The top tax rate was reduced to 50 percent on all income, and all income tax rates were reduced by approximately 25 percent over a three-year period. The ERTA also introduced the idea of indexing individual tax brackets to end the “bracket creep”; created a new cost recovery system for depreciating business assets; reduced the estate and gift taxes; and allowed a credit for incremental research and development expenses.
According to a contemporary Tax Foundation memo, the annual cut was estimated to jump from $38 billion in fiscal year 1982, to $268 billion in fiscal year 1986. The cumulative reduction was estimated to save taxpayers $749 billion in nominal terms.
From its inception, Reagan’s tax-cutting legacy was revolutionary and transformative. In just two years after the ERTA was passed it was referred to by tax analysts as the “most important piece of tax legislation of last quarter century,” and today is still recognized for its lasting impact on the Internal Revenue Code. The ERTA set the tone for his overall economic policy and created momentum that lead to economic growth carrying through his entire presidency.