Reagan Signs Economic Recovery Tax Act (ERTA) - Top Rate Slashed from 70% to 50%, Corporate Tax Cuts Total $150 Billion Over Five Years

On August 13, 1981, President Ronald Reagan signed the Economic Recovery Tax Act (ERTA) into law, enacting one of the largest tax cuts in American history. The Act reduced the highest marginal individual income tax rate from 70% to 50% and the lowest rate from 14% to 11%, implementing an across-the-board 25% decrease in marginal income tax rates over three years. Capital gains taxes were slashed from 28% to 20%, immediately increasing capital gains revenue from $12.5 billion in 1980 to over $18 billion in 1983. The legislation cut corporate taxes by $150 billion over five years through the Accelerated Cost Recovery System (ACRS), revolutionizing depreciation treatment to dramatically favor capital owners. ERTA also indexed tax brackets for inflation to prevent future ‘bracket creep,’ permanently limiting government revenue growth. The law slashed estate taxes substantially, reducing the burden on wealthy heirs. Based on supply-side economics—the theory that cutting taxes on the wealthy and corporations would stimulate investment and growth—ERTA was promoted heavily by Representative Jack Kemp and Senator William Roth, with ideological support from the Heritage Foundation, American Enterprise Institute, and other corporate-funded think tanks. The fiscal impact was devastating: ERTA cost the federal government an estimated $2 trillion in lost revenue over 1982-1991, while the national debt nearly tripled from $1.1 trillion to $2.9 trillion between 1982 and 1989. Revenue fell 6% in real terms within one year as the economy dipped into the second phase of the ‘double dip recession.’ The deficits became so alarming that much of ERTA was reversed just one year later by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), which Reagan signed on September 3, 1982 after promising $3 in spending cuts for every $1 in tax increases—spending cuts that never materialized. Despite TEFRA raising $100 billion to reverse some cuts, the indexing provision remained, permanently constraining federal revenues. ERTA established the foundational infrastructure for four decades of tax policy favoring corporations and the wealthy at the expense of government capacity to fund public services, setting the template for subsequent Republican tax-cutting initiatives.