OTD in History… August 13, 1981, President Ronald Reagan signs biggest tax cuts into law
By Bonnie K. Goodman, BA, MLIS
OTD in history August 13, 1981, President Ronald Reagan signs the bipartisan Economic Recovery Tax Act (ERTA) at his ranch, Rancho del Cielo in California. The Kemp-Roth Tax Cut was one of the biggest tax cuts in history. The supply-side economic policy set the tone of the new administration but also faltered causing the Reagan recession, with tax increases the economy improved to the Reagan recovery. Reagan long opposed high-income tax rates from his time as an actor, and the tax cut was one of his biggest campaign promises in 1980. Lou Cannon writing in his biography President Reagan: The Role of a Lifetime notes, “The cause of lower taxes became a lifelong obsession with Reagan.” White House aide Richard Darman would comment, “The president absolutely loathes and despises taxes.” (Cannon, 70) Reagan’s tax policy turned out to be one of his presidencies’ greatest legacies.
After Reagan’s inauguration, his administration issued his economic policy on February 18, 1981, defined as Reaganomics, and entitled America’s New Beginning. A Program for Economic Recovery with tax cuts a key element and reducing regulation. The economic plan devised by Treasury Secretary Donald Regan and Office of Management and Budget Director David Stockman emphasized tax cuts and cutting government spending with the exception of the Defense Department. As Cannon explains, “Broadly speaking, the program reflected Reagan’s advocacies of a quarter century. It called for reductions across the board in the size and scope of government and for shrinking the government’s revenue base. This reduction of the federal role was the unifying element of Reaganomics, which otherwise reflected the competing priorities of the Reagan political coalition.” (Cannon, 199)
Republican Representative Jack Kemp, of New York, and Republican Senator Bill Roth, of Delaware, authored the bipartisan bill. Both were proponents of supply-side economics, incentives that give conditions for business to “produce goods.” The bill included a “25 percent” marginal tax decrease for individuals over three years, the top rate fell from 70 to 50 percent, while at the bottom it dropped from 14 to 11 percent. The bill cut estate taxes and taxes for businesses and “indexed for inflation.”
Reagan spoke to the nation about the cuts in a televised address. Reagan explained, “We presented a complete program of reduction in tax rates. Again, our purpose was to provide incentive for the individual, incentives for business to encourage production and hiring of the unemployed and to free up money for investment.” The bill passed by Congress in its final form on August 3 with a Senate vote of 67–8 and the House of Representatives on August 4, with a vote of 282–95.
The act did the opposite, inflation ballooned, interest rates increased, and the Dow dropped leading to a second recession in the 1978–82 “double-dip recession.” The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), a tax increase was the only way to curb the damage. Afterward, the economy rebounded. Still, despite support for lowering the deficit by cutting spending, Reagan could not cut and did not popular New Deal programs, the combination to a national debt that tripled during Reagan’s time in office, but was the greatest economic boom in the post World War era. The 1981 act along with Tax Reform Act of 1986 was Reagan’s major tax overhaul, which would define his presidency’s economic legacy.
SOURCES AND READ MORE
Cannon, Lou. President Reagan: The Role of a Lifetime. New York: Public Affairs, 2000.
Bonnie K. Goodman has a BA and MLIS from McGill University and has done graduate work in religion at Concordia University. She is a journalist, librarian, historian & editor, and a former Features Editor at the History News Network & reporter at Examiner.com where she covered politics, universities, religion and news. She has a dozen years experience in education & political journalism.