Economic Recovery Tax Act Of 1981 - ERTA

The Economic Recovery Tax Act of 1981 (or ERTA, or the “Kemp-Roth Tax Cut”) was signed into law by President Reagan. It’s known for being the largest tax cut in US history, especially for wealthy Americans, with the top tax rate being cut 20% (the lowest tax bracket was cut only 3% for comparison). Plus, the capital gains tax was cut from 28% to 20%, and the estate tax exemption was raised.

Besides helping Americans—mostly wealthy Americans—roll in the dough, the Economic Recovery Tax Act of ‘81 also expanded eligibility for IRAs, accelerated depreciation deductions that could be taken, and created some small business incentives.

What was ERTA trying to do? In short, ERTA was created with the idea of “trickle-down economics” in mind, which means that money from the wealthiest will trickle down to lower-income classes. It’s saying "you don’t need to tax the wealthy to redistribute wealth to society...it will happen naturally."

At the time, ERTA didn’t give the economy the facelift that pro-ERTA people were hoping for...unemployment was still up, consumers weren’t spending more, and businesses weren’t investing more. Actually, a recession happened soon before the bill, and again after the bill was passed, which has been called a “double-dip recession.” Ouch.

All these years later, the nonpartisan Congressional Research Service (in 2012) and economic analysts around the world (for the past couple decades) largely agree: it’s looking like cutting taxes for the wealthiest Americans had no effect on economic growth or worker productivity—rather, it just made the rich richer and the poor poorer, increasing inequality.

Maybe it’s time to try trickle up? What would that look like, anyway...?