“Reaganomics”: The Economic Recovery Tax Act of 1981

Today’s post, from Reagan Library Education Department staffer Brett Robert, marks a return to our focus on creating classroom-ready resources for teachers and students, as today is the first day of school for many school districts. Welcome back to school.

“Our bill is, in short, the first real tax cut for everyone in twenty years.”  Ronald Reagan, July 27, 1981.

President Reagan’s first year in office was tumultuous to say the least. Minutes after he took the oath of office Iran released the hostages trapped inside the United States embassy. Sixty-nine days into his term the President was shot and seriously wounded by a .22 caliber bullet fired from John Hinckley’s gun. Only seven months into his term he faced a major crisis when the nation’s air traffic controllers decided to conduct an illegal strike.  President Reagan had run a campaign that focused on his desire to tackle three challenges: the economic morass the nation was in, diplomatic relations with the Soviet Union, and modernizing the United States armed services.  Thirty-five years ago, going in to the second half of his first year in office, the President and his fledgling administration had been unable to make significant progress towards these goals, although the President’s approval rating remained over 50 percent.

8/13/81 President Reagan signs the 1981 Tax Reconciliation Bill Rancho Del Cielo

Over the course of the summer the administration and Congress worked on economic policy to attempt to address high unemployment and inflation.  The Economic Recovery Tax Act of 1981 was a comprehensive piece of legislation that President Reagan endorsed.  Introduced in the House of Representatives as House Resolution 4242 in the 97th Congress on July 23, 1981, it eventually became Public Law 97-34 on August 13, 1981 when President Reagan signed the law from his personal retreat, Rancho del Cielo, near Santa Barbara, California.

3/22/1983 President Reagan shaking hands with Jack Kemp at a meeting with a group of Republican Members of Congress to discuss the 1984 budget of the United States in the White House.

The law reformed the tax code in many of the ways President Reagan describes in the speech above, made just four days after the bill was introduced in Congress.  Beyond reforming the tax code and drastically reducing marginal tax rates, the bill marked a departure from both liberal tax policy associated with Keynesian economic theory and some have argued it was also a departure from earlier tendencies in the Republican Party.  The policies in the bill had first been proposed in the late 1970s by New York Congressman Jack Kemp, whose initial fame came from his years quarterbacking teams in the National Football League, Canadian Football League, and especially the American Football League.  Kemp and his economic advisers were early proponents of cutting the marginal tax rate to reduce inflation.

“Keynesian economics, which was the dominant theory at the time, said that higher taxes would curb inflation by reducing people’s disposable income and spending, and that any tax cut would exacerbate inflation. Our thinking, by contrast, was that lower taxes would increase the incentive to work, save and invest; if that led to an increase in the supply of goods and services, then the impact would be anti-inflationary.” Bruce Bartlett, who wrote the draft of an earlier version of the bill that became the ERTA, writing in The Atlantic in 2012.

Kemp introduced multiple bills titled “Tax Reduction Act” as early as 1977 in the 95th Congress.

8/13/81 President Reagan meets with the Press after signing the 1981 Tax Reconciliation Bill Rancho Del Cielo.

The collective memory of the nation seems to think the tax cuts associated with the ERTA were extremely popular at the time.  However, as this graph from University of California Santa Barbara shows, President Reagan’s approval rating began dropping in September of 1981, right after the ERTA was signed.  For nearly two years from December of 1981 to October of 1983 President Reagan’s approval rating was below 50 percent, with economic concerns and worries about the effectiveness of “Reaganomics” weighing heavily on the public conscience.

“Things got worse for Reagan in 1982. The public’s view of the economy remained sour, and the president’s ratings during 1982 stayed concomitantly low, in the 40% range, ending the year at 41%. The 1982 midterm elections were not good ones for Reagan and for the GOP. The Republicans lost about 25 seats in the House.” Newport, Jones, and Saad at Gallup.

After President Reagan’s approval rating hit a low point of 35 percent in January of 1983, it rose almost impossibly to 61 percent in November of 1984 as President Reagan won a second term in a landslide.  When the President left office his approval rating was 63 percent and his economic policies were broadly considered successful, over the objections of some detractors.  In the years after President Reagan left office his popularity has grown among many Americans with politicians from both parties continuing to invoke his name, image, and policies in order to capitalize on that popularity. The effects and success of “Reaganomics” continue to be debated by both demagogues and scholars and how one feels about President Reagan’s economic policy generally correlates with their overall opinion of the President. Generally “Reaganomics” is both a shorthand for the economic policies of the Federal Government 1981-1989 set by Congress and the President, as well as a description of the general policy of low personal income tax-rates or tax cuts in combination with high military spending generally associated with President Reagan.

Key Terms:
marginal tax rate
approval rating
Keynesian economics
direct tax

Discussion Questions:
How would you summarize differing opinions on how to combat inflation by changing tax rates?
Why do you think President Reagan’s approval rating was still relatively high in August of 1981?
Do you think cutting taxes helps control inflation or exacerbates inflation?  Why?  Can you effectively argue for the “opposite” side despite your own beliefs?
Why do you think marginal tax rates exist, rather than individuals paying the same tax rate for the first and last dollars they earn?
What sections of the United States Constitution grant and limit the rights of the Federal Government to collect taxes including direct taxes?  What are these rights and powers assigned to the government and how have they changed throughout the history of the United States?

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