Tax Cuts Have Lowered Marginal Rates On Investments

by Mike Godfrey, Tax-News.com, Washington

06 April 2004

President Bush’s tax cuts have lowered the marginal effective tax rate (METR)on new investments, measured as the share of an investment’s economic income needed to cover taxes over its lifetime, according to an announcement by the Treasury Department last Friday.

According to the Treasury, reductions in personal income tax rates, including the lower tax rates on dividends and capital gains, enacted in 2001 and 2003 have reduced the METR in the corporate sector by 18% and in the overall economy by 16%.

“The temporary bonus depreciation provision enacted in 2001 and expanded in 2003 to 50% provides a potent short-term investment stimulus,” explained a Treasury statement. “This provision lowered the METR on new equipment investment from 24.8% to 13.0% in 2003, and could even reduce it further in 2004, the year the provision expires.”

The statement continued: “Taxing income from alternative investments at a more uniform METR …promotes the efficient allocation of resources within the economy by allowing market fundamentals, rather than taxes, to guide financing and investment decisions.”

“By lowering the tax rate on dividends and capital gains, the 2003 Tax Act increased tax uniformity by substantially reducing the METR on income from corporate equity financed investment, relative to other sources of capital income, such as debt and non-corporate income,” the Treasury concluded.

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