As members of the House and the Senate work together to keep taxes low this year, one thing must remain non-negotiable: an extension for the effective reductions in capital-gains and dividends taxes that Congress enacted in 2003.
The very existence of taxes on capital gains and dividends ranks among the worst provisions of America’s labyrinthine tax system. Those who earn capital gains have already paid income taxes on their initial investments. When the government seizes a portion of profits earned as a company increases in value or issues a dividend, it penalizes saving, investment and risk-taking.
The idea of taxing capital gains and dividends has deep flaws and, in time, we ought to eliminate both types of taxes altogether. For the moment, however, keeping them lower, longer appears a very good economic policy.
After September 11, a series of corporate scandals and the end of the dot-com bubble, tax cuts provided the perfect tonic for the economy. While lackluster economic performance characterized both 2001 and 2002, the tax cuts have now helped produce 10 consecutive quarters of strong growth. The NASDAQ Composite stock index, meanwhile, has increased well over a third in the tax cut’s wake. These tax cuts benefited all Americans: More than half of households in our country now own stock and the number of Americans with brokerage accounts has increased for over 20 years running.
People who argue that capital gains and dividend tax cuts only benefit the rich, indeed, haven’t bothered to look at the facts. More than half of households reporting capital gains had adjusted gross incomes of less than $50,000. Even many of the capital-gains recipients who appear “rich” on tax returns are ordinary working people experiencing a one-year surge in income as they sell assets to pay for retirement.
As a result, it shouldn’t surprise anyone that the most liberal components of the Democratic Party now sing the praises of 401(k) plans and talk about the virtues of growth.
Even those who favor bigger government, indeed, ought to support cuts in taxes on capital gains and dividends. When Congress cut capital-gains taxes 50 percent in 2003, the Congressional Budget Office first predicted that revenue would decline $27 billion. Instead, the tax cut actually encouraged new investment and thus increased revenue by $26 billion. The government, in other words, took in more money when Congress cut taxes. That new amount, by the way, is enough to fund the entire Department of Justice.
As it moves to hammer out a tax bill, Congress needs to consider extensions of other vital provisions as well. In particular, I hope that my colleagues will support including tax-relief policies that encourage small businesses to invest, help parents pay for college and make sure that middle-income families don’t have to pay an alternative minimum tax intended for the rich.
Retaining low capital-gains and dividend rates is absolutely vital to economic growth. The bottom line is simple: I will not bring before the Senate any tax measure that does not extend them.
Sen. Bill Frist is majority leader of the Senate.