FROM THE OFFICE OF PUBLIC AFFAIRS

Chairman Thomas, ranking member Rangel, and distinguished members of the House Ways and Means Committee, it is my privilege to appear before you today to discuss the President’s plan for jobs and growth.  Let me begin my testimony by thanking Chairman Thomas for introducing the President’s Jobs and Growth proposal.  I believe that if passed as introduced by the Chairman, the President’s plan will create and secure jobs, accelerate and sustain our recovery, increase workers’ standards of living and increase the economic performance of our nation for many years to come.

This plan is needed because too many people who want jobs can’t find them, and too many people who have jobs are concerned about their job security.  Let me explain.

In the near-term, this plan puts money in consumers’ pockets right away, which will stimulate demand.  The 10% tax rate bracket will expand immediately; helping low-income earners keep more of their pay.  The punitive marriage penalty will end once and for all, and the child credit will increase by $400 to $1,000 per child this year.  The plan will accelerate the additional income tax relief approved in 2001, to accelerate the benefits to the American people.   

Under the President's proposal this year, a typical family of four with two earners making a combined $39,000 will receive a total of $1,100 in tax relief, compared to 2002 – not just this year, but in every year thereafter. 

The tax rate cuts will spur business investment in the near term.  Much investment and new employment comes from small businesses, most of which are S corporations, sole proprietorships, and partnerships.  These businesses are taxed at individual tax rates, so marginal rate reductions help create new jobs and equipment. 

Rate reductions combined with the proposed increase in new equipment expensing for small businesses will give our economy a big boost, and quickly.  According to this Administration’s analysis, our economy will add about 1.4 million new jobs under this plan by the end of next year – that’s the best kind of help to a lot of families, who really need it.

As I stated earlier, the President’s plan also contains the elements for a healthier, higher-performing economy over the longer-term.  A key element of the plan for both fairness and effectiveness is the complete elimination of the double-taxation of dividends.  Anything you tax more of, you will get less of – including business investment.  Today, corporate profits are taxed at 35 percent range, and then these profits, which represent the return on business capital, are taxed again when paid to shareholders, so that total tax on this money can be as high as 60%.

Taxing anything twice is unfair.  It is nothing short of double jeopardy for those who invest in America, and we pay for it with American jobs.

This is a double tax on investment.  When you tax investment, you get less of it.  That policy is directly opposed to economic growth.  Investment is basic to the American economy.  We need to encourage business owners to invest for growth.   Why instead would we punish those who want to invest in America?

Again, this double taxation is unfair, counter-productive and damaging to our economy.  Double taxation makes it doubly difficult for companies to hire new workers, for hardworking taxpayers to save for their retirement, and for the economy to grow and create jobs.  For every dollar a business sends to Washington in taxes, it is one less dollar it can spend to hire a new employee, develop a new product or invest in the future.  For every dollar an individual taxpayer sends to Washington in the form of a dividend tax, it’s one less dollar to invest in a business or save for the future. 

Because the President’s proposal lowers the cost of capital by reducing the double taxation of capital, it encourages investment and a higher long-term growth rate.  Lower capital taxes mean more capital, which means higher productivity, which means faster growth and higher wages for everyone.

Also, ending the double taxation of dividends benefits people who will never receive a penny of dividends, because they will live in a more prosperous economy. 

This package is good economics.  The President’s plan makes the economy more efficient, which raises productivity, which raises real wage rates, which raises the standard of living, which in turn provides more choice, opportunity, security and confidence for the American people.

In addition, dividend tax relief will stimulate the economy by increasing disposable incomes and by raising stock market share prices, inducing a “wealth effect.”  We are now a nation of shareholders: over half of families own stock shares, many of which pay dividends.

Let me further illustrate the argument.  Let’s say a family owns 200 shares of a $50 stock with a 3% yield.  That means they receive $300 in dividends from those shares each year, but they only keep $200 of that because of the dividend tax.  Without that tax, they keep another $100, which they can spend as they please.  That means higher consumer spending.

But there is potentially a much larger benefit from higher equity prices and the wealth effect.  If our hypothetical company has 200 million shares outstanding, the effect of eliminating the double taxation of dividends is to increase the shareholders’ after-tax earnings by up to $100 million.  That is, $100 million of dividends that would have gone to shareholder taxes are now kept by the shareholders.  These additional earnings are capitalized into the price of the company’s shares, assuming a certain discount rate and earnings multiple, so they might add, say, $1 billion to the market cap of the company.  This encourages “wealth effect” spending by the owners, which we saw in great abundance in the last decade, and it lowers the cost of capital for the company.

The President’s goal is to do something now that would pay off today and long into America’s future – not here today, gone tomorrow.  President Bush’s jobs and growth plan will not only help American’s achieve their economic dreams, creating a more abundant future with more good and secure jobs and rising real wages.  

I urge this committee to pass it quickly.  Thank you.