what was the economic recovery tax act of 1981 
the economic recovery tax act of 1981 erta was the largest tax cut in u s history signed by president ronald reagan about six months after he took office erta slashed the top income tax rate and allowed for faster expensing of depreciable assets it included incentives for small business and retirement savings and established inflation indexing of tax brackets understanding the economic recovery tax act of 1981erta was also known as the kemp roth tax cut after its republican sponsors representative jack kemp of new york and senator william v roth of delaware the biggest tax cuts were for wealthy americans with the top rate cut from 70 to 50 over three years the bottom bracket was cut from 14 to 11 besides tax cuts and accelerated depreciation deductions other features of the legislation included easier rules for establishing employee stock ownership plans esop expanded eligibility for individual retirement accounts iras a reduction in the capital gains tax from 28 to 20 and a higher estate tax exemption the indexing of tax brackets was a key provision given the era s double digit annual inflation which was pushing even lower and middle class families into higher brackets 12erta inspired by supply side economicsthe bill was inspired by supply side theories of economics advanced by economist and reagan adviser arthur laffer the basic idea was that cutting taxes on the wealthy would spur more capital investment and innovation with the benefits trickling down to average citizens through job growth and increased consumer spending in return tax revenues would rise as the economy boomed but erta did not immediately jumpstart the economy as proponents expected business capital investment remained anemic unemployment stayed high and consumer spending did not increase meanwhile in the year after the bill s passage the federal deficit spiked due to the drastic decline in tax revenue congress blunts erta a year laterby the time erta became law the second half of the double dip recession was beginning in the u s partly because federal reserve chair paul volcker was determined to quash inflation with the benchmark interest rate as high as 20 with the economy tanking and tax revenue sinking the u s deficit began to soar an alarmed congress responded by reversing some of the provisions in the erta in september of 1982 with the tax equity and fiscal responsibility act led by senate finance committee chair robert dole recovery began almost immediately the erta remains controversial growth did rebound in the mid and late 1980s and proponents cited the tax cuts as the reason why although it is unlikely to be the final word in 2012 the non partisan congressional research service analyzed tax rates and their economic effects from 1940 to 2010 and concluded that lowering top tax rates has no effect on economic growth or productivity but does contribute to greater wealth inequality 3 under reagan the u s national debt tripled to 2 6 trillion 4