In the News
Tax code must encourage investment to spur growth and create jobs
There has been a vigorous political discussion on tax rates for capital gains and dividends in recent weeks. It is time to take a step back and review how investment income is really taxed and how it impacts taxpayers, the American economy and our ability to compete internationally.
Capital gains and dividend tax rates paid by individuals represent only a portion of the overall level of taxation applied to corporate earnings. A new study prepared by Ernst & Young illustrates the many layers of taxation – at federal, state and local levels – that are applied to the same dollars earned by individual investors. When you factor in these layers of taxation, you discover that taxpayers face an integrated tax rate on investment income of 50.8 percent. This level of taxation places America at a competitive disadvantage to most other developed nations fighting to attract precious investment dollars.
America is stuck in a lagging economic recovery that could get worse before it gets better. Companies need capital to grow and create new jobs, but looming tax increases threaten to discourage new investment and reduce income for taxpayers at every level. If Congress fails to act, the 15 percent tax rate on capital gains and dividend income will rise to as high as 23.8 and 43.4 percent respectively, beginning in 2013.
If this tax increase happens, America will have an integrated tax rate of 56.7 percent on capital gains – the second highest among OECD and BRIC countries. Integrated tax rates on dividends would soar to 68.6 percent – significantly higher than all other countries measured in the study. What would this mean for our economy and individual taxpayers? The answer is relatively simple.
Capital is mobile. Other countries understand that and have reduced corporate and investment tax rates while America has maintained the status quo. Higher taxes on investment income discourage capital formation and could force investors to seek opportunities elsewhere. Draining investment potential for American businesses slows growth, inhibits productivity, depresses wages and could diminish returns for individual investors at every income level. Furthermore, an increase in dividend tax rates could discourage companies from paying dividends, which play an important role in corporate governance in addition to the monetary benefits they provide taxpayers.
It has become politically convenient to say that capital gains and dividends merely benefit the wealthy. However, taxpayers at every income level benefit through investments they hold, businesses they own, or retirement plans that help them build economic security. According to 2009 data from the Internal Revenue Service, of the taxpayers reporting capital gains, approximately 62 percent of those had incomes less than $100,000. American seniors are especially dependent on dividend income. A January 2010 Ernst & Young study found that 61 percent of the 27.1 million tax returns claiming dividend income in 2007 were filed by taxpayers age 50 and older and 30 percent were from taxpayers age 65 and older.
America needs tax reform. We should seize the opportunity to build a tax code that encourages investment to spur economic growth and help create new jobs. Maintaining current tax incentives for capital gains and dividend income is critical to achieving that goal. Failure to extend these rates would cost jobs – at an average rate of 231,000 jobs lost per year by one estimate – and diminish economic output.
The coming years should be a period of great opportunity and promise in America. We cannot risk letting political rhetoric overshadow the need for pro-growth policies that will help America maintain its edge in the global marketplace. If politics wins, businesses, workers and taxpayers at every income level will lose.
McCrery is a former member of the House of Representatives and served for a time as the ranking Republican on the House Ways and Means Committee which deals with tax policy. He is now manager of the Alliance for Savings and Investment (ASI). ASI is a coalition of dividend-paying companies, trade associations and investor organizations whose top legislative priority is making permanent today’s current low tax rates on capital gains and dividends.