Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)
What it is:
The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) became law on September 3, 1982. The TEFRA made it more difficult for individuals and corporations to reduce their tax liability.
How it works (Example):
Representative Pete Stark (D-CA) introduced the bill, which had 12 co-sponsors, on November 13, 1981. TEFRA had four major objectives: improve tax compliance and collection, close certain tax loopholes, increase certain excise taxes and increase certain employment taxes.
More important to investors, TEFRA created a 10% withholding tax for dividends (which was then repealed by the Interest and Dividend Tax Compliance Act of 1983). TEFRA also removed some accelerated depreciation deductions for corporations, although the basic shortening of asset tax lives was left intact (which still favored companies from a tax perspective).
Why it Matters:
During the Reagan administration, the rationale for a tax increase was to make tax evaders pay rather than raise taxes on everyone at a time when worries over the budget deficit were high. The tax increase was approximately 0.8% of GDP, or $37.5 billion per year. This created a controversy about whether TEFRA was one of the country's largest tax increases.