Definition of Tax Equity And Fiscal Responsibility Act Of 1982 (TEFRA)

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) is 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.

Understanding 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 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 The Tax Equity and Fiscal Responsibility Act of 1982 also rescinded some of ERTA's reductions in marginal personal income tax rates that had not yet gone into effect.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

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)


Real GDP Growth