Tax Equity

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The Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, 96 Stat. 324 (Sept. 3, 1982) (TEFRA), a United States federal law, rescinded some of the effects of the Economic Recovery Tax Act of 1981 (ERTA, colloquially known as the Kemp-Roth Tax Cut) passed the year before.

The scheduled increases in accelerated depreciation deductions were repealed, a 10 percent withholding on dividends and interest paid to individuals was instituted, and the Federal Unemployment Tax Act wage base and tax rate were increased. Excise taxes on cigarettes were temporarily doubled, and excise taxes on telephone service temporarily tripled, in TEFRA.[1]

President of the United States Ronald Reagan agreed to the tax hikes on the promise from Congress of a $3 reduction in spending for every $1 increase in taxes. Some conservatives, led by then-Congressman Jack Kemp, claim that the promised spending reductions never occurred[2] . One week after TEFRA was signed, H.R. 6863 - the Supplemental Appropriations Act of 1982 which Ronald Reagan claimed would "bust the budget" [3] was passed by both houses of Congress over his veto[4]. Four years later, then-budget director David Stockman, however, stated that Congress substantially upheld its end of the bargain, and cites the Administration's failure to identify management savings and its resistance to defense spending cuts as the key impediments to greater outlay savings.[5]

The original TEFRA bill as passed by the House lowered taxes[6]. The Democratic-controlled Senate replaced the text of the original House bill with a number of tax increases, and the bill became law after Ronald Reagan signed it. A lawsuit was filed by Garrison R. Armstrong claiming that TEFRA violated Article One of the United States Constitution which requires all revenue bills to originate in the House. The United States Court of Appeals for the Ninth Circuit ruled against Armstrong, saying

We therefore conclude that the Senate did not exceed its authority under the origination clause when it proposed the extensive amendments that ultimately became TEFRA.

In 1988, libertarian political writer Sheldon Richman described TEFRA as "the largest tax increase in American history". In 2003, former Reagan adviser Bruce Bartlett wrote in the National Review that

"TEFRA raised taxes by $37.5 billion per year", elaborating, "according to a recent Treasury Department study, TEFRA alone raised taxes by almost 1 percent of the gross domestic product, making it the largest peacetime tax increase in American history."[7]

A chart from the United States Department of the Treasury study[8] showing the bill's effect on government revenues is reproduced below. As it shows, the TEFRA increased tax revenues by almost 1% (0.98%) of GDP, in marked contrast to the 1981 tax cuts and the milder effects of the other Reagan-era tax bills. The study makes note that these government revenue estimates do not take into account the effect of the bills on GDP, and therefore, are not inclusive of resulting increases in revenue that would occur from an increase in GDP

Tax Equity

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