Background
The Economic Recovery Tax Act of 1981 (ERTA), also known as the Kemp-Roth Tax Cut, aimed to stimulate economic growth in the United States. The legislation was a central piece of President Ronald Reagan’s economic policy and reflected the influence of supply-side economics.
Historical Context
In the early 1980s, the United States faced stagflation, characterized by high unemployment, high inflation, and stagnant economic growth. The ERTA was part of a broader strategy to rejuvenate the US economy by reducing the taxation burden on individuals and businesses, thereby promoting investment and consumption. The legislation was enacted in August 1981.
Definitions and Concepts
The Economic Recovery Tax Act of 1981 included several key provisions:
- Reduction of individual income tax rates by 23% over three years
- Introduction of accelerated cost recovery system (ACRS) for depreciable property
- Establishment of incentives for small businesses
- Provision of various tax advantages to encourage savings
Major Analytical Frameworks
Classical Economics
Classical economists might analyze ERTA’s policies as a way to enhance economic efficiency by reducing tax-induced distortions and allowing the market to allocate resources more effectively.
Neoclassical Economics
Neoclassical economics would predict that lower tax rates improve incentives for labor supply, savings, and investment, potentially leading to increased output and economic growth.
Keynesian Economics
Keynesians might critique the ERTA by arguing that tax cuts can lead to larger budget deficits during periods when demand management through government spending is necessary for economic stability.
Marxian Economics
Marxian economics would view ERTA as benefiting capitalists disproportionately and exacerbating income inequality by offering substantial tax relief predominantly to higher-income individuals and corporations.
Institutional Economics
Institutional economists might examine how the ERTA reshaped institutional incentives and structures within the US economy, influencing long-term development patterns and economic norms.
Behavioral Economics
Behavioral economists could investigate the real-world effectiveness of the tax incentives introduced by the ERTA, considering how actual behavior deviates from purely rational responses to tax cuts.
Post-Keynesian Economics
Post-Keynesians would likely focus on the macroeconomic impact of the ERTA, particularly on aggregate demand, and criticize the potential exacerbation of fiscal imbalances.
Austrian Economics
Austrian economists would support the ERTA as an effort to reduce government intervention in the economy, advocating that tax cuts improve individual freedom and entrepreneurial activity.
Development Economics
Development economists might assess the ERTA within a wider context of how tax policy can stimulate or hinder economic growth, especially with regard to the impacts on income distribution.
Monetarism
Monetarists might favor the ERTA’s approach to economic growth, emphasizing that stable money supply combined with lower tax rates can promote economic stability and growth.
Comparative Analysis
When compared with other historical tax cuts, such as the Kemp-Roth Tax Cut or later the Tax Cuts and Jobs Act of 2017, the ERTA serves as a critical case study in examining the impacts of supply-side economics on both revenue and economic growth. The effectiveness and long-term outcomes of these tax policies remain subjects of debate among economists.
Case Studies
Economists have looked at specific sectors affected by the ERTA, such as small businesses, to analyze the effectiveness of the law in stimulating growth and investment.
Suggested Books for Further Studies
- “Reaganomics: Supply-Side Economics in Action” by Bruce Bartlett
- “The Age of Reagan: A History, 1974-2008” by Sean Wilentz
- “The Great American Jobs Scam” by Greg LeRoy
Related Terms with Definitions
- Supply-Side Economics: An economic theory that argues economic growth can be most effectively fostered by lowering taxes and decreasing regulation.
- Stagflation: A situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high.
- Accelerated Cost Recovery System (ACRS): A method of depreciation faster than the straight-line method, providing businesses with a quicker tax reduction on capital expenditures.
- Taxation and Revenue: The application and impact of tax policies on both government revenue and economic behavior.
