Reagan Signs TEFRA Reversing Much of ERTA - Largest Peacetime Tax Increase Raises $100 Billion After Revenue Collapse

On September 3, 1982, President Ronald Reagan signed the Tax Equity and Fiscal Responsibility Act (TEFRA) into law, reversing substantial portions of the Economic Recovery Tax Act he had signed just 13 months earlier. TEFRA raised nearly $100 billion in federal revenues through closure of tax loopholes, tougher enforcement, and rescinding some of ERTA’s marginal personal income tax rate reductions that had not yet taken effect, particularly raising corporate rates. Libertarian writer Sheldon Richman described TEFRA as ’the largest tax increase in American history,’ a characterization echoed by Reagan adviser Bruce Bartlett, who calculated TEFRA raised taxes by $37.5 billion per year, nearly 1% of GDP—making it the largest peacetime tax increase in American history. The reversal became necessary because between summer 1981 and summer 1982, tax revenue fell by approximately 6% in real terms due to both the ‘double dip recession’ and ERTA’s rate cuts, while the federal deficit rose rapidly. Senate Finance Committee Chairman Robert Dole led the initiative to reverse most personal tax cuts, though critically not the inflation indexing provision that permanently constrained future revenues. Reagan agreed to the tax hikes based on a promise from Congress of $3 in spending reductions for every $1 in tax increases—promised cuts that conservatives led by Representative Jack Kemp claim never materialized. Despite the substantial revenue increase, TEFRA was achieved primarily through cancellation of future ERTA tax cuts that had yet to take effect, so taxpayers still received $375 billion in net tax cuts over the following three years. Reagan lobbied for TEFRA not as a ’tax bill’ but as a ‘revenue measure,’ refusing to acknowledge it contradicted his ‘supply side-trickle down’ economic program. The TEFRA episode revealed the fundamental flaw in supply-side theory: tax cuts do not pay for themselves through economic growth, and dramatic revenue shortfalls require either subsequent tax increases or devastating cuts to government services. However, the lesson was ignored by subsequent Republican administrations, which continued implementing tax cuts for the wealthy and corporations while running massive deficits, establishing a pattern of ‘starve the beast’ fiscal policy designed to force reductions in social spending.