For tax cuts: A jump-start for the economy
1:57 PM 5/09/03
Pete du Pont
While the economy is growing, it is not growing fast enough. Job growth is lagging and business investment has declined over eight consecutive quarters. To spur growth in the U.S. economy, President Bush has proposed much-needed tax relief, both for consumers and investors. Unfortunately, while most of the country is focused on events overseas, opponents of tax relief are working overtime to slash his proposal by as much as half.

The Bush plan will put more money in the hands of all Americans, by speeding up many of the cuts already passed into law.

By accelerating relief from the marriage penalty, an estimated 46 million families would receive an increased standard deduction. Tax-rate reductions scheduled for 2004, 2006 and 2008 would be advanced to Jan. 1, 2003, immediately moving several million Americans into the lower 10-percent tax bracket. President Bushs tax plan also would raise the child credit by $400, benefiting an estimated 34 million families.

The net result of President Bushs family-based tax relief is that taxes for more than 100 million families would decrease, adding at least $52 billion to family pocketbooks in 2003 alone. According to the Treasury Department, the income tax burden of 3 million American families would be eliminated. Furthermore, the federal deficit is expected to peak in 2004 and decline thereafter.

But perhaps more important to spurring economic growth are his proposals to boost investment and create more jobs. Bush has proposed accelerating corporate income tax rate reductions to Jan. 1, 2003, and tripling the amount small businesses are allowed to expense.

Yet the centerpiece of his job-creation package is his proposal to end the tax on dividends.

When a corporation earns a profit, it pays taxes as high as 35 percent. If shareholders receive some of those earnings as dividends, they pay taxes too. If the corporation decides not to pay dividends, and instead retains those after-tax earnings, the shareholders still dont win as they dont get the money and will have to pay taxes on the increased value of the company when they sell the shares.

In both cases, corporate income is taxed twice, creating a cumulative tax rate as high as 60 percent. This double taxation is not only unfair -- taxing something twice -- it creates a bias in financial markets against the payment of dividends, equity financing and capital accumulation. The result is less investment, a lower capital stock, and lower wages for American workers.

Eliminating this onerous double taxation will also help millions of Americans directly. There are 53 million U.S. households, including more than half of all seniors, who own equities that are subject in some form to this double tax.

As a result of this proposal, 26 million American taxpayers would receive an average tax cut of $704 in 2003. And contrary to accusations by some critics, this will not only benefit the wealthy. More than 40 percent of people who receive dividends make less than $50,000 per year -- and three-fourths make less than $100,000 per year.

According to Charles Schwab, the stock market could be expected to rise 10 percent to 15 percent upon this proposals passage, sending an immediate bolt of renewed confidence through the entire economy. So elimination of the tax on dividends also benefits investors who dont own dividend paying stocks, by raising stock prices. This is important, as more than half of all American families now own at least some stocks.

Ending the tax on dividends also has the added benefit of increasing shareholder confidence and reducing the crisis in corporate governance. Executives will have less incentive to cook the books. Increased investment will lower debt levels, reducing the risk of bankruptcy. And American companies will be discouraged from relocating overseas.

The Presidents Council of Economic Advisers estimates Bushs jobs and growth plan will create 1.4 million new jobs by the end of 2004, with nearly one-third of those jobs created as a result of ending the tax on dividends. Private estimates are even higher.

Whats just as important, though, is that by reducing marginal tax rates, increasing small business investment and eliminating tax on dividends, the Bush tax plan will ultimately boost the wages of American workers and create jobs for those who desperately need them. This is critically important for our future economic security.

Du Pont is the policy chairman of the National Center for Policy Analysis.