H.R. 4242, Economic Recovery Act of 1981

President Reagan’s initial proposal called for enacting the Kemp-Roth reductions in marginal rates for personal income taxes and a new accelerated depreciation program for businesses.  Kemp-Roth proposed a 10% reduction in marginal personal tax rates for three successive years, and became known as 10-10-10.  The accelerated cost recovery plan called for collapsing business depreciation schedules into three categories: 10% per year for real estate; 5% per year for equipment; and 3% per year for vehicles.  This became known as the 10-5-3 plan.  These tax cuts, if implemented, would have led to a reduction of around 3% of GNP (the metric then in use) in federal revenues according to Congressional Budget Office estimates.  Since President Reagan was proposing a major increase in defense spending, a balanced budget would only have been achievable by implementing major reductions in entitlement programs (especially Social Security) and substantial reductions in discretionary domestic spending programs.

In the end, Congress went much further in cutting taxes than Reagan had originally proposed. In fact, the President had reluctantly agreed to reduce the Kemp-Roth cuts to a 5-10-10 basis, thus reducing the hit to the federal treasury.  But in order to win passage of the core elements of his tax program Reagan was forced to engage in a bidding war to obtain the votes needed to win passage of his tax bill in the House of Representatives.

President Reagan signs the Economic Recovery Act into law.

President Ronald Reagan signs the Economic Recovery Tax Act of 1981, Rancho del Cielo, 1981. Image Courtesy of the Ronald Reagan Presidential Library.

The leading Democrat in the fight over tax policy was Ways and Means Chairman Dan Rostenkowski of Illinois.  Rosty (as he was known) was a Chicago politician who did not like to lose legislative battles.  The Democratic tax proposal aimed to direct personal income tax cuts to taxpayers earning below $50,000 per year.  Its provisions for business depreciation were less generous.  It would have reduced federal revenue by a much smaller amount.  It would have made more realistic the goal of attaining a balanced federal budget by 1984 (Reagan’s stated objective).

In order to defeat the Democratic alternative and win passage of the President’s tax program, the White House economic team (led on tax policy by Secretary of the Treasury Donald Regan, but including OMB Director David Stockman, White House Chief of Staff Jim Baker, his assistant Richard Darman, and White House Congressional Liaison Max Friedersdorf ) initiated a bidding war for congressional votes.  Concessions were made to both senators and representatives.  In response, Rostenkowski offered tax plums in order to hold in line wavering Democrats.

The bidding war over the tax bill greatly drove up its cost. When combined with the large increase in defense spending and less robust reductions in other spending than Reagan had originally sought, the result was large federal deficits in 1982 and beyond.

Jim Jones was a member of the Ways and Means Committee and had been active in promoting business tax cuts in previous congresses.  He was an advocate of 10-5-3 and did not support the Kemp-Roth tax rate reductions.  Materials in his Ways and Means files from 1981 make clear the complexity of the issues surrounding proposals to offer businesses accelerated depreciation, as well as the theoretical foundations of supply-side tax cuts.

Legislative History Student Narratives H.R. 4242