Tax relief now

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On Tuesday, the day the Dow Jones industrial average hit a six-year high (11,640) and came within 100 points of its record close (11,723), House and Senate negotiators finalized a five-year, $70 billion tax-relief package featuring a two-year extension of two important tax cuts that deserve much of the credit for the Dow's three-year-long rally. Also included in the package is a one-year, $31 billion patch to the Alternative Minimum Tax problem, which would otherwise engulf an additional 15.3 million taxpayers. The House was expected to pass the measure last night; and the Senate, where it needs a simple majority, could approve the bill today.

Let's review some history. By the end of 2002, relative to their peaks in early 2000, major U.S. stock indexes had suffered serious setbacks: The 30 Dow industrials were off 29 percent; the broad-based S&P 500 was down 42 percent; and the tech-heavy Nasdaq composite had plunged 73 percent. On Jan. 7, 2003, President Bush unveiled a tax-cut package highlighted by the elimination of the double taxation of stock dividends. In addition to accelerating the implementation of many of the tax cuts passed in 2001, the tax package that emerged from Congress in May 2003 reduced the maximum tax rate on dividends from 38.6 percent to 15 percent, and it cut the top capital-gains tax rate from 20 percent to 15 percent. However, the dividend and capital-gains cuts were scheduled to expire at the end of 2008. The tax package that just emerged from House and Senate negotiations would extend the maximum 15-percent rates for dividends and capital gains through the end of 2010, when virtually all of President Bush's 2001 tax cuts are also scheduled to expire.

What has happened since May 2003, when Mr. Bush signed the law establishing the 15 percent tax rates for dividends and capital gains? The Dow has increased by 32 percent; the S&P 500 has gained 39 percent; and the Nasdaq is up 50 percent. Compared to the $125 billion in capital-gains tax revenues that the Congressional Budget Office projected for 2004-05 in January 2003 (before the rate cuts), CBO reported in January that the actual capital-gains revenues for this two-year period (after the tax cuts were enacted) totaled $151 billion.

Meanwhile, the economy has experienced a major expansion, which took off in the second quarter of 2003, when the tax rates on dividends and capital gains were cut. Over the past 12 quarters, for example, U.S. gross domestic product has increased at an average annual rate of 3.9 percent. Business investment, which declined during each of the nine quarters preceding the 2003 tax cut, has increased at an average annual rate of 9.1 percent during the following three years. The economy has added 5.2 million nonfarm payroll jobs since May 2003 (an average of 150,000 per month), as the unemployment rate has fallen from its cyclical peak of 6.3 percent in June 2003 to 4.7 percent today. Indeed, today's unemployment rate is lower than the average of the 1990s, 1980s, 1970s and 1960s. And if the two-year extension of the 15 percent tax rate for dividends and capital gains helps to reduce the unemployment rate to 4.5 percent, then it would be lower than the average rate for the 1950s, too.

With that kind of history, why would anybody not want to extend the dividend and capital-gains tax cuts for another two years? That is a question worth asking Democrats today and in November.