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Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)

Definition

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) is a U.S. federal legislation signed into law to increase tax revenue and reduce the federal budget deficit. TEFRA achieved this through the implementation of new taxes, closing tax loopholes, and implementing stricter enforcement of existing tax regulations. The act played a significant role in addressing economic issues faced by the U.S. during the 1980s.

Phonetic

The phonetics of the keyword TEFRA (Tax Equity and Fiscal Responsibility Act of 1982) would be:TEE – ef – ruh

Key Takeaways

  1. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) was primarily aimed at reducing the federal budget deficit by increasing revenue through closing tax loopholes and introducing new taxes.
  2. TEFRA introduced reforms such as tightening tax payment rules, changing depreciation rules for businesses, and increasing excise taxes on fuels, alcoholic beverages, and tobacco products.
  3. Despite the primary intention of reducing the deficit, TEFRA also contained provisions that led to the increase in some taxpayer’s liabilities, including higher income individuals and corporations, raising concerns about potential negative impacts on economic growth.

Importance

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) is important because it was a major tax legislation in the United States that aimed to reduce the federal budget deficit through tax increases and spending cuts. TEFRA marked a significant shift in U.S. fiscal policy by reversing some of the tax cuts implemented under the Economic Recovery Tax Act of 1981 (ERTA). It introduced new revenue-generating provisions, including tightening tax shelters, increasing corporate and individual tax rates, and modifying the alternative minimum tax. The Act also imposed new cost-containment measures on Medicare and Medicaid, enhancing fiscal responsibility. Overall, TEFRA demonstrated the government’s commitment to addressing economic challenges and restoring fiscal balance, establishing it as a notable milestone in the history of U.S. financial policy.

Explanation

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) was a landmark piece of legislation designed to address growing concerns over the ballooning federal budget deficit in the United States. The primary purpose of TEFRA was to augment federal revenue by raising taxes while simultaneously overhauling the tax code to eliminate loopholes and encourage greater fiscal responsibility among businesses, investors, and taxpayers. By increasing tax revenues and streamlining the tax collection process, TEFRA aimed to reduce the deficit and stabilize the country’s economic growth.

TEFRA was instrumental in laying the groundwork for future tax reform efforts. Its provisions included the introduction of new taxes on business activities, tightening of tax deduction restrictions, and the establishment of stricter enforcement mechanisms. One of its most significant components was the implementation of stricter tax treatment of passive income and the curbing of tax shelters, which were often employed by high-income earners to minimize their tax liabilities.

In addition to its domestic impact, TEFRA also had a notable influence on international taxation, providing policymakers with crucial tools to address tax evasion and avoidance by multinational corporations. Overall, TEFRA represented an important step toward a more equitable tax system and laid the foundation for future endeavors to enhance fiscal responsibility in the United States.

Examples

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) was signed into law on September 3, 1982, by President Ronald Reagan. TEFRA aimed to reduce the federal budget deficit through a combination of spending cuts, tax increases, and reform measures. Here are three real-world examples of how TEFRA impacted businesses and the economy:

1. Increased Corporate Taxes: TEFRA raised the corporate income tax rate from 46% to 50% and introduced a 10% withholding on corporate dividends. This increase in tax rates affected businesses across various industries, resulting in higher expenses for companies and potentially reducing profitability. The additional revenue generated by these tax hikes was used to reduce the federal deficit.

2. Closing Tax Shelters and Loopholes: TEFRA tightened tax provisions and closed several tax shelters and loopholes commonly used by businesses and wealthy individuals to reduce their tax liabilities. For instance, the act eliminated the preferential capital gains treatment for depreciable real estate and limited the investment tax credit by denying benefits to property used primarily outside the United States. By doing so, TEFRA aimed to create a more equitable tax system and increase federal tax revenues.

3. Impact on Nonprofit Hospitals: TEFRA introduced new regulations for nonprofit hospitals regarding their qualification for tax exemptions. These hospitals were now required to provide a specific level of care to low-income patients and refrain from certain billing and collection practices to maintain their tax-exempt status. This change compelled nonprofit hospitals to reevaluate their policies and strategies, ensuring that they met the new requirements to keep their tax benefits.

Frequently Asked Questions(FAQ)

What is the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)?

TEFRA is a United States federal law that was enacted on September 3, 1982, with the primary intention of reducing the federal budget deficit. The act introduced numerous changes to the US tax code, including new taxes, tax rate adjustments, and alterations to deductions and credits to increase government revenue.

What were the main provisions of TEFRA?

TEFRA’s main provisions included the tightening of tax rules for businesses and individuals, adjustments to personal income tax brackets, the elimination of certain deductions, the introduction of alternative minimum tax for corporations, and an increase in federal excise taxes.

How did TEFRA impact businesses?

TEFRA affected businesses by increasing tax rates, tightening rules for tax deductions and credits, and introducing the corporate alternative minimum tax. These changes aimed to ensure that businesses would contribute a fair share of taxes in an effort to decrease the budget deficit.

How did TEFRA affect individual taxpayers?

For individual taxpayers, TEFRA adjusted tax brackets, eliminated certain deductions, and increased certain taxes, such as excise taxes. These changes aimed to ensure that individuals contributed a fair share towards the government’s revenue goals.

What was the purpose of the corporate alternative minimum tax introduced by TEFRA?

The corporate alternative minimum tax (AMT) was designed to ensure that corporations paid a minimum amount of tax, even if they had significant deductions and credits. The AMT prevented businesses from using various tax strategies to avoid paying taxes or significantly reduce their tax liability.

Was TEFRA successful in achieving its goals?

TEFRA was successful in increasing federal tax revenues, and it played a part in the reduction of the federal budget deficit in the years following its enactment. However, some argue that the increased tax burden reduced economic growth and contributed to the recession of the early 1980s.

Are the provisions of TEFRA still in effect today?

While some of the policies introduced by TEFRA still impact the current tax code, many of its provisions have been modified, updated, or repealed by subsequent legislation, such as the Tax Reform Act of 1986 and the Tax Cuts and Jobs Act of 2017.

Related Finance Terms

  • Reagan Tax Cuts
  • Revenue Enhancement Provisions
  • Cost Recovery System (CRS)
  • Fiscal Austerity Measures
  • TEFRA Penalties

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