Economic Recovery Tax Act of 1981

The Office of Tax Analysis of the U.S. Department of the Treasury summarized the tax changes as follows: • 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interest exclusion with 15% net interest exclusion ($900 cap) (begin in 1985) The accelerated depreciation changes were repealed by the Tax Equity and Fiscal Responsibility Act of 1982, and the 15% interest exclusion was repealed before it could take effect by the Deficit Reduction Act of 1984. The maximum expense in calculating credit was increased from $2,000 to $2,400 for one child and from $4000 to $4800 for at least two children. 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 $28,000. At $28,000, the credit for earned income was 20%. The amount for a married taxpayer to file a joint return increased under the Economic Recovery Tax Act to $125,000 from the $100,000 allowed under the 1976 Act. A single person was limited to an exclusion of $62,500. Also increased was the one-time exclusion of gain realized on the sale of a principal residence by someone aged at least 55.{{cite web |url=http://heinonline.org/HOL/Page?handle=hein.journals/aklr15&div=24&g_sent=1&collection=journals# ==Legislative history==

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. 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. 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. Throughout 1981, Reagan frequently met with members of Congress and focused especially on winning the support from conservative Southern Democrats. 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. 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". The bill was signed by Reagan on August 13. == Accelerated Cost Recovery System ==

The Accelerated Cost Recovery System (ACRS) was a major component of the Act and was amended in 1986 to become the Modified Accelerated Cost Recovery System. The system changed how depreciation deductions are allowed for tax purposes. The assets were placed into categories: 3, 5, 10, or 15 years of life. Reducing the tax liability would put more cash into the pockets of business owners to promote investment and economic growth. 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. ==Aftermath==

The most lasting impact and significant change of the Act was indexing the tax code parameters for inflation, Even after the Act was passed, federal individual income tax receipts never fell below 8.05% of the GDP. Combined with indexing, that eliminated the need for future tax cuts to address it. 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% starting July 1, 1983. As a result of that 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, but the bottom 50% of earners' share dropped from 7.5% to 5.7% during the same period. Much of the increase can be attributed to the decrease in capital gains taxes. Also, the ongoing recession and high unemployment contributed to stagnation among other income groups until the mid-1980s. Under ERTA, marginal tax rates dropped (top rates from 70% to 50%)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. which eventually lowered the deficits. After peaking in 1986 at $221 billion the deficit fell to $152 billion by 1989. The Office of Tax Analysis estimated that the act lowered federal income tax revenue by 13% from what it would have been in the bill's absence. Canada, which had adopted the 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 the early 1980s. 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. It concluded that top tax rates have no positive effect on economic growth, saving, investment, or productivity growth; however, the reduced top tax rates increase income inequality: In the words of Thomas L. Hungerford, "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." Tax revenue from the wealthy dropped, and much of the increased wealth collected was at the top of the tax bracket. ==References==