Economic Recovery Tax Act of 1981 (ERTA)
Candlefocus EditorThe ERTA cut the top income tax bracket rate from 70% to 50%. This significantly reduced the federal taxes of individuals in the highest tax bracket, allowing people to take home more of their income, thus providing an injection of money into the economy. In addition to the top rate cut, it reduced other tax rate brackets. It made changes to the capital gains tax rate, by allowing an exclusion of up to one-half of the gains of the sale of a primary residence, and allowing annual indexing (increasing) of brackets so they kept up with inflation. Other personal income tax deductions and credits, such as the dependent exemption, were also leveled up.
The ERTA also increased the personal and corporate tax exemptions, allowing more wealthy individuals and businesses to qualify for them. Business taxes were also reduced, with investment laws for depreciation allowances of certain assets becoming more liberal. The law also loosened restrictions on pension plans, allowing more to qualify.
The ERTA was immensely beneficial to those in higher income brackets, who saw their taxes cut significantly. However, Reagan's tax reform bill ultimately led to a massive surge in federal debt, which tripled in Reagan's term. This was due to a combination of an increase in military spending and tax cuts from the ERTA which did not generate enough economic growth to make up for the government's income loss.
Overall, the ERTA drastically reduced taxes and provided relief to those in the highest tax bracket. While the short-term benefits were felt, in the long-term, the added debt resulted in the U.S. fiscal situation being worse off than when Reagan took office. Despite this, the ERTA has encouraged other tax reform bills and provided insight into how revenue can be gained or lost depending on taxes.