Tax Equity and Fiscal Responsibility Act of 1982
Encyclopedia
The Tax Equity and Fiscal Responsibility Act of 1982 , also known as TEFRA, was a United States federal law that rescinded some of the effects of the Kemp-Roth Act passed the year before. As a result of ongoing recession
, a short-term fall in tax revenue generated concern over the budget deficit. TEFRA was created in order to reduce the budget gap by generating revenue through closure of tax loopholes and introduction of tougher enforcement of tax rules, as opposed to changing marginal income tax rates. TEFRA was introduced November 13, 1981 and was sponsored by Representative Pete Stark
of California. After much deliberation the final version was signed by President Ronald Reagan
on September 3, 1982.
wage base and tax rate were increased. Excise taxes on cigarettes were temporarily doubled, and excise taxes on telephone service temporarily tripled, in TEFRA.
President of the United States
Ronald Reagan
agreed to the tax hikes http://www.policyarchive.org/handle/10207/bitstreams/9126.pdf Some conservatives, led by then-Congressman Jack Kemp
, claim that the promised spending reductions never occurred. One week after TEFRA was signed, H.R. 6863 - the Supplemental Appropriations Act of 1982 which Ronald Reagan claimed would "bust the budget" was passed by both houses of Congress over his veto. 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.
The original TEFRA bill as passed by the House lowered taxes. The Republican-controlled Senate replaced the text of the original House bill with a number of tax increases, and the bill became law after President 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
political writer Sheldon Richman
described TEFRA as "the largest tax increase in American history." In 2003, former Reagan adviser Bruce Bartlett
wrote in 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." However, this "increase" was achieved primarily through the cancellation of future tax cuts scheduled by ERTA the year before that had yet to take effect at the time of TEFRA's passage. Taxpayers still receive $375 billion in tax cuts in the 3 years following TEFRA.
A chart from the United States Department of the Treasury
study 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:
Early 1980s recession
The early 1980s recession describes the severe global economic recession affecting much of the developed world in the late 1970s and early 1980s. The United States and Japan exited recession relatively early, but high unemployment would continue to affect other OECD nations through at least 1985...
, a short-term fall in tax revenue generated concern over the budget deficit. TEFRA was created in order to reduce the budget gap by generating revenue through closure of tax loopholes and introduction of tougher enforcement of tax rules, as opposed to changing marginal income tax rates. TEFRA was introduced November 13, 1981 and was sponsored by Representative Pete Stark
Pete Stark
Fortney Hillman "Pete" Stark, Jr. is the U.S. Representative for , serving since 1973. He is a member of the Democratic Party. Currently he is the 5th most senior Representative, as well as 6th most senior member of Congress overall...
of California. After much deliberation the final version was signed by President Ronald Reagan
Ronald Reagan
Ronald Wilson Reagan was the 40th President of the United States , the 33rd Governor of California and, prior to that, a radio, film and television actor....
on September 3, 1982.
Summary of provisions
The Office of Tax Analysis of the United States Department of the Treasury summarized the tax changes as follows:
- repealed scheduled increases in accelerated depreciation deductions
- tightened safe harbor leasing rules
- required taxpayers to reduce basis by 50% of investment tax credit
- instituted 10% withholding on dividends and interest paid to individuals
- tightened completed contract accounting rules
- increased FUTA wage base and tax rate
Effects and controversies
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 ActFederal Unemployment Tax Act
The Federal Unemployment Tax Act is a United States federal law that imposes a federal employer tax used to help fund state workforce agencies. Employers report this tax by filing an annual Form 940 with the Internal Revenue Service...
wage base and tax rate were increased. Excise taxes on cigarettes were temporarily doubled, and excise taxes on telephone service temporarily tripled, in TEFRA.
President of the United States
President of the United States
The President of the United States of America is the head of state and head of government of the United States. The president leads the executive branch of the federal government and is the commander-in-chief of the United States Armed Forces....
Ronald Reagan
Ronald Reagan
Ronald Wilson Reagan was the 40th President of the United States , the 33rd Governor of California and, prior to that, a radio, film and television actor....
agreed to the tax hikes http://www.policyarchive.org/handle/10207/bitstreams/9126.pdf Some conservatives, led by then-Congressman Jack Kemp
Jack Kemp
Jack French Kemp was an American politician and a collegiate and professional football player. A Republican, he served as Housing Secretary in the administration of President George H. W. Bush from 1989 to 1993, having previously served nine terms as a congressman for Western New York's 31st...
, claim that the promised spending reductions never occurred. One week after TEFRA was signed, H.R. 6863 - the Supplemental Appropriations Act of 1982 which Ronald Reagan claimed would "bust the budget" was passed by both houses of Congress over his veto. Four years later, then-budget director David Stockman
David Stockman
David Alan Stockman is a former U.S. politician and businessman, serving as a Republican U.S. Representative from the state of Michigan and as the Director of the Office of Management and Budget ....
, 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.
The original TEFRA bill as passed by the House lowered taxes. The Republican-controlled Senate replaced the text of the original House bill with a number of tax increases, and the bill became law after President Ronald Reagan signed it. A lawsuit was filed by Garrison R. Armstrong claiming that TEFRA violated Article One of the United States Constitution
Article One of the United States Constitution
Article One of the United States Constitution describes the powers of Congress, the legislative branch of the federal government. The Article establishes the powers of and limitations on the Congress, consisting of a House of Representatives composed of Representatives, with each state gaining or...
which requires all revenue bills to originate in the House. The United States Court of Appeals for the Ninth Circuit
United States Court of Appeals for the Ninth Circuit
The United States Court of Appeals for the Ninth Circuit is a U.S. federal court with appellate jurisdiction over the district courts in the following districts:* District of Alaska* District of Arizona...
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
Libertarianism
Libertarianism, in the strictest sense, is the political philosophy that holds individual liberty as the basic moral principle of society. In the broadest sense, it is any political philosophy which approximates this view...
political writer Sheldon Richman
Sheldon Richman
Sheldon Richman is an American political writer and academic, best known for his advocacy of libertarianism.He is the editor of The Freeman, a magazine published by The Foundation for Economic Education, a Senior Fellow at the Future of Freedom Foundation, a Research Fellow at The Independent...
described TEFRA as "the largest tax increase in American history." In 2003, former Reagan adviser Bruce Bartlett
Bruce Bartlett
Bruce Bartlett is an American historian who turned to writing about supply-side economics. He was a domestic policy adviser to President Ronald Reagan and was a Treasury official under President George H.W. Bush....
wrote in National Review
National Review
National Review is a biweekly magazine founded by the late author William F. Buckley, Jr., in 1955 and based in New York City. It describes itself as "America's most widely read and influential magazine and web site for conservative news, commentary, and opinion."Although the print version of the...
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." However, this "increase" was achieved primarily through the cancellation of future tax cuts scheduled by ERTA the year before that had yet to take effect at the time of TEFRA's passage. Taxpayers still receive $375 billion in tax cuts in the 3 years following TEFRA.
A chart from the United States Department of the Treasury
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
study 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:
| Number of years after enactment | ||||||
| Tax bill | 1 | 2 | 3 | 4 | First 2-yr avg | 4-yr avg |
|---|---|---|---|---|---|---|
| Economic Recovery Tax Act of 1981 | -1.21 | -2.60 | -3.58 | -4.15 | -1.91 | -2.89 |
| Tax Equity and Fiscal Responsibility Act of 1982 | 0.53 | 1.07 | 1.08 | 1.23 | 0.80 | 0.98 |
| Highway Revenue Act of 1982 Highway Revenue Act of 1982 The Highway Revenue Act of 1982 , January 6, 1983, temporarily increased the United States gasoline excise tax from 4 cents to 9 cents through September 30, 1988.... |
0.05 | 0.11 | 0.10 | 0.09 | 0.08 | 0.09 |
| Social Security Amendments of 1983 | 0.17 | 0.22 | 0.22 | 0.24 | 0.20 | 0.21 |
| Interest and Dividend Tax Compliance Act of 1983 | -0.07 | -0.06 | -0.05 | -0.04 | -0.07 | -0.05 |
| Deficit Reduction Act of 1984 | 0.24 | 0.37 | 0.47 | 0.49 | 0.30 | 0.39 |
| Omnibus Budget Reconciliation Act of 1985 Consolidated Omnibus Budget Reconciliation Act of 1985 The Consolidated Omnibus Budget Reconciliation Act of 1985 is a law passed by the U.S. Congress on a reconciliation basis and signed by President Reagan that, among other things, mandates an insurance program giving some employees the ability to continue health insurance coverage after leaving... |
0.02 | 0.06 | 0.06 | 0.06 | 0.04 | 0.05 |
| Tax Reform Act of 1986 Tax Reform Act of 1986 The U.S. Congress passed the Tax Reform Act of 1986 to simplify the income tax code, broaden the tax base and eliminate many tax shelters and other preferences... |
0.41 | 0.02 | -0.23 | -0.16 | 0.22 | 0.01 |
| Omnibus Budget Reconciliation Act of 1987 | 0.19 | 0.28 | 0.30 | 0.27 | 0.24 | 0.26 |
| Total | 0.33 | -0.53 | -1.63 | -1.97 | -0.10 | -0.95 |