How tax relief works

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Since Ronald Reagan took his oath of office nearly a quarter century ago, tax relief has stood at the heart of the Republican Party's agenda. In recent months, however, many Democrats and a handful of Republicans have called for increased taxes: They're wrong. Tax relief has worked and we need to extend it.

Twice in the last four years Congress has passed major tax-relief bills. Together, these laws cut taxes for nearly 100 million Americans, spurred a period of energetic economic growth, improved our budgetary climate and encouraged businesses to invest in the future. In 2001, terrorist attacks, corporate scandals, and the end of the dot-com bubble sent our economy into a tailspin. Tax relief restored it to health.

Let's look at the facts. Since the Senate passed the last part of the president's tax relief program in 2003, our economy has added 4.3 million new jobs, seen unemployment tumble and enjoyed 10 consecutive quarters of robust growth. Although tax rates have gone down, increased economic activity has made up some of the difference: Revenues soared last year and the 2006 budget deficit, as a percentage of GDP, is lower than it has been during 16 of the past 25 years.

We need to continue policies that work and to do that the Senate can't rest on its laurels. Three important tax-relief provisions expire over the next few years, and unless we extend them, Americans will face an automatic stealth tax increase.

For America's entrepreneurs, who create most of our new jobs, enhanced small business expensing tops the list. By letting smaller enterprises charge their capital investments against income, this policy change has lead to a record $210 billion in small business capital expenditures: an increase of more than 15 percent since 2002.

Taxes on capital gains and dividends -- which we eventually need to eliminate altogether -- also need close attention. By seizing a portion of the money that investors make when a company increases in value or hands out cash, these taxes place a tremendous burden on those who put aside money for the future. Furthermore, since a majority of households now own stock it's hard to argue that this type of tax cut benefits the rich alone -- nearly half of all income tax returns that reported capital gains and dividend income came from households with adjusted gross incomes of less than $50,000.

After we cut these investment taxes in 2003, we've seen all of the major stock indices soar: the NASDAQ Composite, which fell when the dot-com bubble burst, has increased well over a third.

Finally, the Senate needs to extend the exception to the alterative minimum tax (AMT). Without a policy change, this tax, originally intended to make sure that the very rich paid the government something, will start to hit the middle class. This year, fewer than 4 million people, most of them very well off, will pay it. If Congress doesn't act, however, an additional 17 million will need to cough up next year. In Nashville, Tenn., for example, a nurse and a high school teacher earning the average wage for their professions will wake up on Jan. 1, 2006, to find out that the IRS has decided that they are "rich" and may have to pay the AMT. This is absurd.

Tax relief has worked. In the coming months, I'll do everything I can to make sure that the Senate stays the course, extends tax relief and keeps the economy growing.

Senate Majority Leader Bill Frist is a Republican from Tennessee.