Economic Recovery Tax Act signed

On August 13, 1981, President Ronald Reagan signed the Economic Recovery Tax Act in Washington after the 97th Congress approved the largest tax cut in modern American history. The statute, often called the Kemp-Roth tax cut, reduced individual income tax rates over three years, cut the top marginal rate sharply, and created the Accelerated Cost Recovery System for business investment. Reagan and congressional Republicans presented the law as the centerpiece of a supply-side program designed to revive growth after the stagflation and recession of the 1970s.

The act intensified the economic debate over whether lower tax rates would generate growth quickly enough to offset lost revenue and restrain inflation. Reagan's allies argued that the Federal Reserve under Paul Volcker was already squeezing inflation out of the economy and that the tax cut would reward work, saving, and investment at the same time. Democratic critics and many budget hawks warned that the combination of the Economic Recovery Tax Act, defense spending increases, and a deep recession would produce large federal deficits instead of a balanced revival.

The Tax Equity and Fiscal Responsibility Act of 1982 followed directly from the budget pressure created after the 1981 tax cut took effect and receipts fell during recession. The Economic Recovery Tax Act also established the tax-policy framework that Reagan and Congress revised again in the Tax Reform Act of 1986, making the 1981 law the opening move in a broader remaking of federal tax policy.