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Senate GOP Mark Anniversary Of 'Remarkably Successful' Investment Tax Cuts

by Mike Godfrey,, Washington

23 May 2007

Marking the four-year anniversary of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), which falls on May 28, Congressional Republicans have said that the tax cuts on capital investments brought about by the legislation have been "remarkably successful."

Two of the most significant provisions of JGTRRA were the reductions of the tax rates applicable to dividends and to capital gains received by individual taxpayers. Prior to that change, dividends were taxed at a taxpayer’s marginal tax rate, which in 2002 could be as high as 38.6%. The 2003 tax cuts reduced the dividend-tax rate to 15% for most taxpayers (and to 5% for taxpayers in the lowest two tax brackets). In addition, the 2003 tax cuts reduced the capital-gains tax rate from 20% to 15%.

The lower tax rates on dividends and capital gains were designed to reduce the double taxation of corporate profits, equalize the taxation of returns on capital investments, and decrease the tax burden on individuals who invest in corporate equities. In so doing, it was expected to reduce the cost of capital for American businesses. Nevertheless, four years on, the tax cuts are still attracting criticism, principally that only a relatively small number wealthy Americans have benefited. This is an argument that Republicans firmly reject.

Pointing to a 2005 survey of equity ownership in the US by the Investment Company Institute and the Securities Industry Association, the Senate Republican Policy Committee said in a policy paper released last week that more than half (50.3%) of American households – representing 91.1 million individuals – owned equities such as stocks or mutual funds in 2005.

According to IRS, Statistics of Income data, in 2005, the most recent tax-year data available, 26 million tax filers reported $112 billion of dividend income that qualified for the lower tax rates. The majority of these tax filers were middle-income taxpayers: 10.5 million tax filers had annual gross income (AGI) less than $50,000 and reported an average of $1,200 of dividend income and 18.1 million tax filers had AGI less than $100,000 and reported an average of $1,600 of dividend income.

The Senate GOP also said that the rate reductions on capital investments have also played an important role in the strong economic growth that has occurred since they were enacted. Since May 28, 2003, when the 2003 tax cuts were signed into law, the primary stock-market indexes have shown significant gains. Dividends paid by S&P 500 companies increased by 35% since the lower rates took effect from $166 billion in 2002 to $224 billion in 2006, while dividends paid per share also increased from $18.03 in 2002 to $24.88 in 2006.

"This has encouraged shareholders to realize gains they have accumulated on stocks and other capital investments, unlocking investment capital that is critical to the market," the paper observed.

The success of the 2003 rate reductions are also evidenced by the resulting reforms and improvement in economic efficiency in the corporate sector, the Republicans said. By equalizing the dividend and capital-gain rates, the 2003 tax cuts have largely eliminated a bias that prompted corporations to reinvest their earnings in new equipment or the development of new products or services, even when such actions might not complement the core competency of the business.

The paper also noted that the benefits of the tax cuts have extended beyond taxpayers and the larger economy by leading to a surge in tax receipts, claiming that since the capital gains rate was reduced in 2003, revenues have exceeded official CBO projections by 68%.

"Despite the opponents’ predictions, the lower tax rate on capital investments has been remarkably successful," said the policy paper. "It has resulted in a dramatic increase in dividend distributions, benefiting all Americans owning dividend-paying stocks, a significant number of whom are far from wealthy. It has also encouraged investors to realize capital gains, unlocking critical capital for business growth and increased employment. Moreover, it has promoted greater economic efficiency and significant reforms in the corporate sector of the economy."

"As the fourth anniversary of this landmark tax-relief law approaches, Republicans should take credit for enacting strong, pro-growth economic policy, and should continue their efforts to make the relief permanent," the paper said.

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