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President Ronald Reagan signs the bill at his California ranch in 1981

Reagan gives a televised address from the Oval Office, outlining his plan for Tax Reduction Legislation in July 1981

The Economic Recovery Tax Act of 1981 (also known as ERTA or the Kemp-Roth Tax Cut) was "A bill to amend the Internal Revenue Code of 1954 to encourage economic growth through reductions in individual income tax rates, the expensing of depreciable property, incentives for small businesses, and incentives for savings, and for other purpose." Pub.L. 97-34, 95 Stat. 172, enacted 1981-08-13) It also reduced marginal income tax rates in the United States by 25% over three years (the top rate falling from 70% to 50% while the bottom rate dropped from 14% to 11%) and indexed the rates for inflation, though the indexing was delayed until 1985. Its sponsors, Representative Jack Kemp and Senator William Roth, had hoped for more significant tax cuts, but settled on this bill after a great debate in Congress. It passed Congress on August 4, 1981 and was signed into law on August 13, 1981 by President Ronald Reagan at his California ranch.

In 2003 (revised 2006), the United States Department of the Treasury released a non-partisan economic study^[1] showing the effect on government revenues of all Reagan-era tax bills. As the chart shows, the 1981 tax act produced a major loss in government revenues (almost 3% of GDP), in marked contrast to other Reagan-era tax bills, which had neutral or even revenue-gathering effects.

      REVENUE EFFECTS OF MAJOR TAX BILLS ENACTED UNDER REAGAN (as percentage of GDP)

                                                        Number of
                                                    years after enactment     First
                                                  --------------------------   2-yr   4-yr
Tax bill                                            1      2      3      4      avg    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.....................   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.......   0.02   0.06   0.06   0.06   0.04   0.05
Tax Reform Act of 1986..........................   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

1. ^ Office of Tax Analysis (2003, rev. Sept 2006). "Revenue Effects of Major Tax Bills". United States Department of the Treasury. Working Paper 81, Table 2. Retrieved on 2007-11-28.