Statement by the U.S. Chamber on the President's Economic Growth Proposals for Submission to the House Committee on Ways and Means
Statement by the U.S. Chamber of Commerce on the President's Economic Growth Proposals for Submission to the House Committee on Ways and Means
March 18, 2003
The U.S. Chamber of Commerce appreciates this opportunity to express its views on the President's Jobs and Economic Growth Plan. The U.S. Chamber is the world's largest business federation, representing more than three million businesses and organizations of every size, sector and region. This breadth of membership places the Chamber in a unique position to speak for the business community.
The Economy and the President's Jobs and Growth Plan
Recently released data show the U.S. economy to be one that is still searching for confidence, balance, and momentum. Real GDP growth during the most recent 5-quarter period has averaged only 2.9%, insufficient to consistently generate new jobs. Indeed, over this time span, the U.S. economy has lost about 1.3 million jobs. Moreover, many economists have trimmed their forecasts for first half growth. Although some recent monthly data show enough incipient signs of improvement to keep the nation hopeful that the economy will accelerate in the future, policy initiatives are clearly warranted. With the Fed having cut interest rates about as far as possible, fiscal policy appears to be our only remaining choice. Fortunately, the President has proposed a bold program for economic growth that includes a host of proposals, including significant tax cuts, creation of broad new savings and retirement vehicles, targeted tax incentives, and permanent repeal of the insidious "death tax."
The keystone of the President's program is his Jobs and Economic Growth Plan — a package of tax cuts designed to boost consumption and encourage investment. This proposal would accelerate marginal tax rate cuts, marriage penalty relief, the increase in the child credit, and the expansion of the 10 percent bracket passed in his landmark 2001 tax bill; enhance Section 179 capital asset expensing for small businesses; and eliminate the double taxation of dividends. This is a well-balanced package that will increase economic growth, both in the near term and for the long run.
The White House understands that the biggest need of American businesses large and small, and in all sectors and regions, is customers with the will and the means to spend. Moreover, the best way to boost consumption is to increase disposable income and wealth. The President proposed a number of tax cuts that were passed by a bipartisan Congress in 2001, but were delayed full implementation for budgetary reasons. If these cuts were good policy then, they are even better policy now. Marginal income tax rate cuts, expanding the size of the 10 percent rate bracket, fixing the marriage penalty, and increasing the child credit will put more disposable income in the hands of American consumers immediately.
The President's expansion of the lower income tax brackets makes the 10 percent bracket applicable to more income, which benefits all individuals who pay U.S. income taxes — and makes the 15 percent bracket applicable to more income of married couples. These measures will put more money in the hands of those most needing and prone to spend it, thus cycling it back into the economy, where it will do further good.
This proposal is also good for business. Many smaller businesses are organized as flow-through entities, such as S corporations, whose owners pay taxes at the individual rates. They will see an immediate cash flow benefit from the lower marginal rates. The Section 179 expensing provision will both triple the maximum deduction and introduce enhanced phase-out levels, stemming the erosion in the value of depreciation deductions that would otherwise occur over time. This, in turn, will further augment current cash flow and encourage and enable these companies to invest in new machinery and equipment, increasing their productivity and providing a further boost to the economic sectors that produce and service those items. In sum, these funds will be used to grow businesses and create new jobs.
One of the most misunderstood and maligned, but nonetheless important, pieces of the President's package is the elimination of double taxation of dividends. When a business earns profits, those profits are subjected to corporate income tax. When those profits are subsequently distributed in the form of dividends, they are taxed again at the individual level — resulting in a second layer of tax on the same income. The President's proposal would allow corporations that have already paid tax on their profits to distribute those profits without further taxation on those same dollars.
This piece of the package has received the most criticism, unjustly and erroneously challenged by some as an unnecessary and inefficient giveaway to the rich. Over 50 percent of Americans own stock and many of these stockowners are elderly retirees who must live off the proceeds of their lifetime of investments. It is simply unfair to tax them twice. Removing the inequity will leave more American taxpayers more of their hard earned money, and they will spend it, stimulating the nation's economic growth.
While the direct benefits go to stockholders, indirect benefits will accrue to the entire economy. Removing the double tax will increase after-tax rates of return on investments, bolstering stock prices and lowering the cost of capital. Businesses will invest more, boosting economic growth and creating more jobs. While raising stock prices is not the main intent of the dividend proposal, we should not overlook its importance. Stocks are a major component of wealth and any improvement to beleaguered stock prices will surely help to mitigate the negative wealth effects of the last couple of years.
Elimination of the double tax on dividends will have important salutary effects on corporate governance. Under tax law, debt financing has traditionally enjoyed a marked advantage over equity financing. While a distribution in repayment of debt financing allows for corporate tax deductibility of its interest component, a distribution of the return on equity financing, a dividend, does not. Put another way, corporate income that is associated with payment of interest is taxed only once — to the payee — as it is fully deductible to the corporation against that income. This is in clear contrast to the dividend, in which the corporation is fully taxed on the associated income and receives no deduction for the corresponding payment, while that income is fully taxed again to the recipient. This inequity disfavors equity financing, and results in tax-inefficient allocation of resources.
Likewise, this causes an undesirable "whipsaw" effect. While payment of the return on equity financing, i.e., dividends, is subject to a tax disadvantage, corporations have routinely been permitted to hold onto their reported earnings, rather than being called upon by their stockholders to distribute them. Under current tax law, many of these stockholders enjoy a tax advantage by letting these dividends accumulate, thus boosting the worth of the company and the associated stock prices, which gives rise to more advantageous capital gains taxation when the shares are sold. Under pressure to buoy stock prices, corporate managers are more than happy to assent, and may become prone to "manage" corporate earnings — occasionally creatively — in an attempt to maximize them. At the same time, the gross inequity between dividends and interest may cause a run-up of debt in relation to equity, which some have credited with making the corporation more susceptible to default and bankruptcy.
Elimination of the double taxation of dividend income will improve corporate governance by alleviating these inequities. Removal of the shareholder's incentive to let managers blindly accumulate or hoard corporate income will bring those earnings under closer scrutiny. In some cases, shareholders will demand distribution of some of those earnings, which will keep management more honest about their financial reporting, because while irregularities in reported earnings can sometimes evade detection for awhile, non-receipt of a dividend check is more easily and quickly recognized. Furthermore, the President's plan would allow an increase to the shareholder's stock basis for corporate income which could otherwise be distributed as tax-free dividends, but which is accumulated. Both the shareholders and IRS will get annual notification of these increases, hence more scrutiny. In all, the plan will create more transparency, make corporate earnings easier to monitor, and place equity financing on an economically healthier, more equal footing with debt financing.
The President's plan also preserves the benefits of the foregoing provisions against encroachment by an antiquated Alternative Minimum Tax (AMT) — a tax that is increasingly hurting the middle class. Protection is provided to both single and joint filers via a limited amount of relief against the increase in AMT that would be automatically levied on taxpayers due to these tax changes.
While businesses and the workforce are mobilizing for recovery and growth, the President's Personal Reemployment Accounts will assist many of those who are trying to recover from the economic downturn. These accounts will give a helping hand to people while attempting to find reemployment by giving them up to $3,000 to use for job training, child care, transportation, or to defray the costs of relocating. And the help doesn't necessarily stop there. As an added incentive, if a job is obtained within 13 weeks, the worker would be permitted to keep any unused funds remaining in the account.
Conclusion
The economic implications of the President's Jobs and Growth Plan are huge. Economic simulations done by the Administration suggest that passage of this package could boost real economic growth in 2003-2004 by 0.8 to 1 percentage point per year and create 500,000 to 900,000 new jobs each year. Numerous private sector simulations have also been run to project the effects of the president's package on real GDP and employment growth. One private simulation concluded that passage of the package would yield an additional 0.5 to 1.0 percentage points of real GDP growth and 242,000 to 894,000 new jobs over 2003-2004. Another study found even greater positive results, projecting an additional 0.5 to 1.8 percentage points of real GDP growth and 800,000 to 2.9 million new jobs.
Even with these predictions of positive benefits, detractors have contended that these cuts are not needed. They claim that the economy is picking up steam on its own and that we don't need a tax cut that will increase budget deficits already swollen with additional spending for homeland security and war in Iraq. We believe they are wrong on both counts. The economy is growing, but it is still well below its potential. A well-designed tax cut is sound insurance — especially given the current geopolitical uncertainties — and good long-term public policy. As for the deficit issue, the best way to address the deficit is to control federal spending and lift economic growth to its job-creating potential with the President's timely, well-balanced tax plan.
In sum, this plan is just what we need.