Thursday, the Senate closed their week by approving a tax benefit package for investors.
Following a favorable House vote of 244-185, the Senate approved the measure 54-44. It was essentially a party-line
vote. One member of each party did not vote, three from each party switched sides. Three Republicans voted against
the measure - Olympia Snow of Maine, Lincoln Chaffee of Rhode Island and George Voinovich of Ohio. Three Democrats
approved the legislation - Ben Nelson of Nebraska, Bill Nelson of Florida and Mark Pryor of Arkansas.
The announcement Wednesday by the Treasury Department that April tax revenue exceeded $315 billion (second highest
ever) and that the 12-month total tax revenue was up by 13.4 percent lent momentum to the quick legislative action.
President Bush will sign the bill next week.
The Tax Foundation reported that the current economic recovery coincides with the investor-oriented tax cuts that
went into effect in 2003. Since then, the Christian Science Monitor reports, some 5.3 million new jobs have been
created, the unemployment rate has fallen from 6.3 percent to 4.7 percent, household net worth has risen by $13
trillion and, even in wartime, the budget deficit has declined some $38 billion. In others words, when the investor
class had more money to invest, they did.
Strong economic growth means people have more income and more income means a larger tax base. Folk Marxism assumes
that citizens are the property of the state. Their income belongs to the government. What they receive in cash
is a function of politicians allocating the spoils and deciding how much the government can "afford"
to let the earners keep.
Just how wrong-headed that philosophy is can be demonstrated by the fact that with a lower rate the government
is collecting more money from both capital gains and dividend taxes. In the past 12 months, receipts have risen
14.5 percent, four times faster than inflation. In the years 2002-04, the dividend tax was reduced from 39.6 percent
to 15 percent and the capital gains tax rate reduced from 20 percent to 15 percent. In that same time period, tax
receipts rose 79 percent.
Away from Washington, the daily real world knows that the level of taxation affects incentives to work, save, invest
and create entrepreneurial adventures. The right kind of growth policy, it would seem, is one that preserves low
rates on work, saving and investment.
Major Provisions
In the absence of new legislation, on January 1, 2009, capital gains taxes would rise to 20 percent and dividends
would be taxed at a 35 percent rate. The new bill holds the 15 percent rate for both until the beginning of the
year 2011. Also extended was the provision for small investor taxpayers in the 10 and 15 percent brackets whose
rates would drop to zero in 2008.
Some 15 million taxpayers will avoid the perils of the alternative minimum tax (AMT) because the legislation includes
both an increase in the triggering amount and a relaxation of the rules on personal tax credits.
In the past, taxpayers with an AGI (adjusted gross income) of less than $100,000 could convert their traditional
IRA (Individual Retirement Account) to a Roth IRA. In a Roth IRA the investor pays tax on the savings when they
are put into the account. However, withdrawals, including earnings accumulated over the years, are tax-free. The
$100,000 maximum will be eliminated in 2010. All may convert after that time. If investors wait until 2010 to actually
do the conversion, the legislation allows them to pay the tax over two years and not owe the tax until 2011.
These provisions reduce but do not eliminate the negative effect of double taxation. When income is taxed and the
take-home remainder saved and invested only to be taxed a second time, double taxation occurs. Dividend taxes are
a second tax on investors in a company that has already paid a 35 percent corporate tax. There is no second tier
of income taxation on those who spend all their money.
Double taxation reduces the benefits of saving and investing and encourages consumption. In the light of the retirement
claims coming up against a burdened Social Security and Medicare, double taxation is the exact opposite of what
the individual needs. The essence of financial freedom is accumulating capital. It is the process of capital formation
in a nation that produces long-term growth and higher living standards. Depriving citizens of the opportunity to
accumulate capital condemns them to servitude.
Writing in Human Events, Daniel Mitchell says "Whether measured by economic growth rates, job creation,
productivity, wealth creation, financial markets or unemployment, the United States is easily outperforming nations
such as Germany, France and Japan. Indeed, per capita GDP in the United States is about 40 percent higher than
it is in the European Union."
It wasn't an accident. It isn't coincidence. It's capitalism at work.
05/12/06
