Focusing on the tax cut of 1982, did the personal current tax receipts recover from the tax cut within three years?
YES
NO
The correct answer and explanation is:
Correct Answer: YES
Explanation:
The Economic Recovery Tax Act of 1981 (ERTA), commonly referred to as the Reagan tax cuts, was signed into law by President Ronald Reagan and became effective in 1982. It was one of the largest tax cuts in U.S. history, reducing marginal income tax rates across the board, with the top rate dropping from 70% to 50% over three years, and the bottom rate decreasing from 14% to 11%.
As a result of the tax cuts, personal current tax receipts—the federal government’s income from individual income taxes—initially declined in 1982 and 1983. However, this decline was short-lived.
By 1985, just three years after the tax cut took effect, personal current tax receipts had recovered to pre-tax-cut levels. According to data from the U.S. Bureau of Economic Analysis (BEA):
- In 1981, personal current tax receipts were approximately $285 billion.
- They dipped in 1982 and 1983 due to the tax cuts and economic recession.
- By 1984, with the economy rebounding, receipts increased significantly.
- By 1985, they had fully recovered and surpassed the 1981 levels, reaching around $348 billion.
The recovery was driven by several factors:
- Strong economic growth beginning in late 1983 and continuing through the mid-1980s.
- Increased employment and income, which expanded the tax base.
- Inflation indexing of tax brackets, beginning in 1985, which helped prevent “bracket creep.”
Conclusion:
While the 1981 tax cut (effective 1982) initially caused a drop in revenue, personal current tax receipts recovered within three years, making the correct answer YES. This recovery is often cited in debates on the effectiveness of supply-side economic policies.