DEFINITION of 'Tax Equity And Fiscal Responsibility Act Of 1982 - TEFRA'

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) is a federal tax legislation passed in 1982 to increase revenue in the country through a combination of federal spending cuts, tax increases and reform measures. The legislation modified some aspects of the Economic Recovery Tax Act of 1981 (ERTA). Both of these pieces of tax legislation took place during the Reagan Presidency.

BREAKING DOWN 'Tax Equity And Fiscal Responsibility Act Of 1982 - TEFRA'

The Economic Recovery Tax Act of 1981 (ERTA) was a piece of tax legislation that greatly lowered income tax rates, and all excessive high rates were reduced to a maximum of 50%. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) modified aspects of the ERTA which raised concerns over potential budget deficits that were rising rapidly because of a falling revenue and increasing government expenditures. TEFRA was signed into law to reduce the growing deficit by generating revenue through closure of evident loopholes in the tax system, introduction of stricter compliance and tax collection measures, increasing excise taxes on cigarettes and telephone services, and increasing corporate taxes. The Tax Equity and Fiscal Responsibility Act of 1982 also rescinded some of ERTA's reductions in marginal personal income tax rates that had not yet gone into effect.

Furthermore, TEFRA removed some of the tax breaks businesses received in the ERTA, such as the increase in the amount of accelerated depreciation that a company could deduct. The signed bill also instituted a 10% withholding tax on dividends and interest paid to individuals who had no certified tax identification numbers. TEFRA affected a broad range of taxpayers as it modified the rules governing pension plans, life insurance companies, corporate mergers, acquisitions and redemption of stock, safe harbor leases, completed construction contract accounting, partnership audits and partners' liability for tax. Thus, the enactment of the bill made it more difficult for individuals and corporations to reduce their tax liability.

Other tax changes that were brought about under TEFRA include:

  • increased Federal Unemployment Tax Act (FUTA) wage base (from $6,000 to $7,000) and tax rate (from 3.4% to 3.5%)
  • requirement of taxpayers to reduce basis by 50% of investment tax credit
  • tightened safe harbor leasing rules
  • retracted the $1,000,000 "small issue" tax exemption for any Industrial Development Bond (IDB) issued
  • Read more here on all the tax cuts and increases of TEFRA

TEFRA was considered the largest peacetime tax increase in American history as part of a budget deal to get the federal deficit under control. Reluctantly signing the bill into law, President Ronald Reagan stated that he was supporting "a limited loophole-closing tax increase to raise more than $98.3 billion over three years in return for ... agreement to cut spending by $280 billion during the same period." In the period between 1981 and 1986, it was believed that TEFRA will reclaim approximately $215 billion of the $750 billion given up by ERTA. According to the Bureau of Economic Analysis (BEA), the economy's growth rates after TEFRA took effect were among the fastest in history.

Source: Bureau of Economic Analysis (BEA)

Year/Quarter

Real GDP Growth

1982/III

-1.50%

1982/IV

0.40%

1983/I

5.00%

1983/II

9.30%

1983/III

8.10%

1983/IV

8.40%

1984/I

8.10%

1984/II

7.10%

RELATED TERMS
  1. Economic Recovery Tax Act Of 1981 ...

    A law signed by President Ronald Reagan for the largest tax cut ...
  2. Effective Tax Rate

    The effective tax rate is the average rate at which an individual ...
  3. Tax Liability

    A tax liability is the amount an individual, corporation or other ...
  4. Tax Base

    A tax base is the amount of assets or income that can be taxed.
  5. Tax Expense

    A tax expense is a liability owed to federal, state/provincial ...
  6. Direct Tax

    A direct tax is a tax paid directly by an individual or organization. ...
Related Articles
  1. Taxes

    Trump Signs Tax Reform Bill

    The president signed the GOP's overhaul of the federal tax code into law.
  2. Insights

    How Fortune 500 Companies Avoid Paying Income Tax

    President Donald Trump is not alone in not paying taxes.
  3. Insights

    Opinion: Why Corporate Tax Cuts Won't Make America Grow

    The federal debt will go up and, surprisingly, a number of corporations will actually lose money if the Trump tax plan becomes law.
  4. Taxes

    States Without Sales Tax

    There are five states that do not charge sales taxes, instead, they other taxes the states levy instead in order to generate revenue.
  5. Taxes

    Do U.S. High Corporate Tax Rates Hurt Americans?

    The United States has the highest corporate tax rate of the 34 developed, free-market nations that make up the Organization for Economic Cooperation and Development (OECD).
  6. Taxes

    "Temporary" Taxes That Stuck

    Taxpayers should be wary when a new "temporary tax" is introduced. Sometimes these temporary taxes are anything but.
  7. Taxes

    Tax Haven Vs. Tax Shelters: Is There a Difference?

    Learn about the difference between tax havens and tax shelters, and how both are used to reduce tax liability or avoid paying taxes altogether.
  8. Taxes

    Highest Corporate Taxes By Sector

    The amount a U.S. company pays in tax depends upon the sector it is in.
  9. Retirement

    Income Taxes and Your Retirement Accounts

    Converting a traditional IRA or 401(k) to a Roth IRA may save you money on your taxes.
  10. Taxes

    'Largest Tax Cut in Our Country's History' Hikes Most People's Taxes

    About that "nobody in the middle class is going to get a tax increase" …
RELATED FAQS
  1. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
  2. What are the differences between regressive, proportional, and progressive taxes?

    Learn the three basic types of tax systems--regressive, proportional, and progressive--used in the U.S., and how they affect ... Read Answer >>
Trading Center