February
23, 2005
Make The Tax Cuts Permanent
By
Jon Kyl
President Bush spent a lot of time on the
campaign trail last fall urging Congress to "make the
tax cuts permanent." To most voters, this probably
sounded like a pretty good idea, even if they weren't precisely
sure of which tax cuts he meant, or why they're not already
permanent.
The answer is about more than legislative
process: it's about Congress taking action to stop a tax
hike that would average $1,184 per family from taking effect
- automatically - in just a few years.
To understand how we got into this situation,
flash back to the President's key tax cuts of 2001 and 2003,
which were critical to pulling the U.S. economy out of a
lingering recession. Senate Democrats used the threat of
a filibuster to prevent those cuts from being permanently
written into law, so they had to be limited to the lifespan
of the President's original budget (10 years).
After that point, the cuts are scheduled
to "sunset," or expire, automatically triggering
what would end up being the largest tax hike in American
history. The most egregious example is that the estate,
or "death," tax, would gradually fall to zero
in 2010 and then spring to life again at its previous level
of up to 60 percent in 2011. (Predictably, this has led
to a lot of macabre humor about precisely timing one's final
departure.)
Along with Senate Majority Leader Bill Frist, I've introduced
legislation that would permanently eliminate the death tax,
and also nail down the key reductions in tax rates on income,
dividends and capital gains. Consider other implications
if Congress fails to act:
* Individual
Income Tax Rates and Productivity
The
top income tax rate today is 35 percent, but it will rise
to 39.6 percent if Congress doesn't act. Other brackets
are similarly affected.
A number of studies have shown that people
choose to work less as their income taxes rise. The 2004
winner of the Nobel Prize in Economics, Dr. Edward Prescott
of Arizona State University, has found that Americans work
50 percent more than the French and that "marginal
tax rates explain virtually all of [the] difference."
In other words, lower U.S. tax rates are responsible for
high U.S. productivity, which has driven our economic expansion.
Failing to make the lower income tax rates
permanent would have the opposite effect, discouraging people
from working, saving and investing. This is particularly
true for the nation's 23 million small businesses, which
are by far the greatest beneficiaries of lower individual
tax rates because most pay taxes as individuals, not corporations.
* Dividends
and Capital Gains
The 15 percent tax rate for both expires in 2008, after
which the capital gains rate would rise to 20 percent and
the levy on dividends tracks higher individual brackets.
Congress simply cannot play games and wait until the last
minute - just before the lower rates are about to expire
- to extend them. Financial markets, business and families
are making decisions about the future now. The key here
is predictability: the economic growth generated by lower
rates can only be sustained by making them permanent, giving
investors the confidence to make long-term decisions. Without
it, we face lower investment, slower economic growth, and
lost jobs.
President Bush's tax cuts have benefited
all Americans: because the economy has improved, companies
are hiring more workers, and businesses are making smarter
investment decisions less distorted by arbitrary tax considerations.
Moreover, those who own stocks, including tens of millions
in 401(k) and other retirement plans, have seen their nest
eggs grow.
Ultimately,
a growing economy is the key to all other policy priorities.
A recent Wall Street Journal editorial noted that
"a stronger economy resulting from permanently lower
tax rates on capital and investment will make it easier"
to deal with, among other things, the massive crisis facing
Social Security. A massive tax hike caused by Congress allowing
critical tax cuts to expire, on the other hand, would be
a disaster.
Senator
Kyl sits on the Senate's Finance and Judiciary committees
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