Reagan signs Economic Recovery Tax Act ERTA
On this day in 1981 at his California home Rancho del Cielo Ronald Reagan signs the Economic Recovery Tax Act (ERTA) a historic package of tax and budget reductions that set the tone for his administrations overall economic policy.During his campaign for the White House in 1980 Reagan argued on behalf of supply-side economics the theory of using tax cuts as incentives for individuals and businesses to work and produce goods (supply) rather than as an incentive for consumers to buy goods (demand).In Congress Representative Jack Kemp Republican of New York and Senator Bill Roth Republican of Delaware had long supported the supply-side principles behind the ERTA which would also be known as the Kemp-Roth act.
The bill which received broad bipartisan support in Congress represented a significant change in the course of federal income tax policy which until then was believed by most people to work best when used to affect demand during times of recession.The ERTA included a 25 percent reduction in marginal tax rates for individuals phased in over three years and indexed for inflation from that point on.The marginal tax rate or the tax rate on the last dollar earned was considered more important to economic activity than the average tax rate (total tax paid as a percentage of income earned) as it affected income earned through extra activities such as education entrepreneurship or investment.Reducing marginal tax rates the theory went would help the economy grow faster through such extra efforts by individuals and businesses.
The 1981 act combined with another major tax reform act in 1986 cut marginal tax rates on high-income taxpayers from 70 percent to around 30 percent and would be the defining economic legacy of Reagans presidency.Reagans tax cuts were designed to put maximum emphasis on encouraging innovation and entrepreneurship and creating incentives for the development of venture capital and greater investment in human capital through training and education.The cuts particularly benefited idea industries such as software or financial services fittingly Reagans first term saw the advent of the information revolution including IBMs introduction of its first personal computer (PC) and the rise or launch of such tech companies as Intel Microsoft Dell Sun Microsystems Compaq and Cisco Systems.
Economists have argued to what degree Reagans economic policy drove the boom of the 1990s but his tax program undoubtedly set in motion powerful forces of change that would result in both short- and long-term economic gains.On the other hand critics of so-called Reaganomics argued that his tax cuts and the effects of steady economic growth disproportionately benefitted the wealthy and increased the gap between the nations rich and poor.
