What is Economic Recovery Tax Act of 1981 (ERTA)

Dec 31, 2023 By Susan Kelly

Different federal laws have been passed, and among these different laws, one that everyone needs to know is the Economic Recovery Tax ACT of 1981. This is a law that was made for economic growth, and taxes help with this growth. However, not a lot of people are knowledgeable on this topic and don’t know the importance of this ERTA law.

If you are interested in learning more about this Act, then this article has everything that you need to know about. Here, we have mentioned a detailed guide through which you will be able to learn everything related to the Economic Recovery Tax Act 1981.

What is the Economic Recovery Tax Act of 1981?

This was a federal law tax that was passed on August 13, 1981. This Act was proposed by the 97th US Congress and was meant to encourage economic growth by the taxes that the people provide and give to the government. This legislation can also be called the Kemp-Roth Tax Cut. The law was proposed, and then it was signed by the President of that time, Ronald Reagan.

One of the significant benefits that the government got with imposing this federal law was that it slashed the top income tax rates. It also allowed for the faster expensing of the depreciable assets. This Act, proposed in 1981, is considered the most significant tax cut in the history of the US.

Understanding the Working of the Economic Recovery Tax Act:

After ERTA was imposed, it started cutting the taxes after its Republican sponsors, Representative Jack Kemp of New York and William V. Roth, Senator of Delaware. It was seen that wealthy Americans were the people who had the most significant tax cuts, and the top rate was cut from 70% to 50% in three years. It was also seen that the bottom bracket was also reduced, which was cut from 14% to 11%.

Other than this, many different aspects of this rule were imposed. One of the rules was the accelerated depreciation deductions and more accessible rules for establishing employee stock ownership plans. There was also extended eligibility for the Individuals Retirement Accounts. They even reduced the capital gains of tax from 28% to 20%. There was also a higher estate tax exemption. Hence, all of these were some of the main changes that came with the imposition of ERTA in 1981.

When we talk about the objectives of ERTA, the following are some of the primary objectives that they introduced, and the following are the main aims:

  • Offering tax cuts that will help in the growth of the economy.
  • They even introduced capital cost recovery of fixed investments such as plants, equipment, and real estate.
  • With the help of the ERTA, incentives were also provided that helped increase savings in the economy.

The Tax Cut Under the Economic Recovery Tax Act:

The main aim of the ERTA federal law was to reduce the tax return from civilians, which would increase economic growth. Following are some of the significant tax cuts that came after the ERTA 1981 was imposed.

The first impact was on the depreciation of the taxes. The accelerated cost recovery system (ACRS) increases the depreciation of the tax reductions. This was also a way through which the depreciation ways were changed, and it was then used for the reduction of the taxes.

  • The indexing of the individual tax brackets was done. There was a 23% cut in the individual tax rates.
  • There was a massive change in the tax rate cut. It was reduced from 70% to 50% in the span of three years.
  • The lowest tax rate was 14%. After the imposing of this Act, it was reduced to 11%.
  • The real estate tax exemption was also impacted here. Before the Act was imposed, the tax exemption was around $600,000; however, after the imposing of the tax, it was increased to $175,000. This was to promote the capital cost recovery of the states.
  • After the imposing of this ERTA in 1981, all working taxpayers were required to establish their retirement accounts (IRAs). The main aim of this was to increase savings in the economy as it would boost growth.
  • There was an exclusion for the two-earner married couples. A 10% exclusion was made for married couples up to the value of $3000.
  • The profits gains on the Taxations windfall were reduced.
  • There was a reduction in the capital gains. They went from 28% to 20%.
  • The ERTA is also indexed for inflation.

The Effects of ERTA:

There were a lot of different aims and objectives of the ERTA 1981, and it was seen that after this was imposed, there were a lot of things that made a change in the economy. However, it was seen that there were some consequences and effects that came with the Economic Recovery Tax Act of 1981.

Following are some of the main consequences that the economy faced because of this.

  • Since there was a massive tax revenue decline, it was seen that it affected the federal deficit. This means that the deficit increased significantly and affected the working of the government.
  • Consumer spending did not increase even though the taxes were reduced majorly.
  • At the end of 1982, the unemployment rate increased and it went to 11%.

Wrapping Up!

The government introduces new laws all the time, and some are meant for the betterment of the civilians, while others are made for economic growth. The Economic Recovery Tax Act was made to stimulate the growth of the economy. The primary aim of this Act was to ensure that taxes were reduced so that people were able to buy and get things without the worry of taxes. Hence. This ERTA is something that made it possible. So, we hope this article helped you understand more about this Act and how it made changes in the economy.

Latest Posts
Copyright 2019 - 2024