November 17, 2005
js-3021

The Honorable John W. Snow
Prepared Remarks to the Tax Foundation

Good afternoon. Thank you so much for having me here today.  With a number of critical tax issues pending on Capitol Hill, this is a great time for us to discuss just how important it is that we keep our economy on the right path.

There has been much discussion in the halls of congress in the past few days about the extension of Federal tax rates on capital gains and dividends. I'd like to take some time this morning to talk with you about the important role lower tax rates have played in strengthening our economy and creating jobs and the vital need to keep tax rates, on capital gains and dividends in particular, low to ensure continued economic growth in the future. Millions of Americans have benefited from these important tax policies either directly – through lower taxes – or indirectly through new and better jobs and greater economic security for families.

To offer some perspective on where we are today, I'd like to begin by taking a look back to where we were three years ago. We were facing an economy that was really underperforming.  Economic growth was very weak.  Job growth was stagnant.  Businesses were extremely reluctant to invest.  We were coming off a period where the economy was struggling to recover from a recession and a rapid succession of shocks that included the bursting of the equity bubble, terrorist attacks, and a loss of business and investor confidence in light of corporate accounting scandals.

President Bush, to his great credit, recognized that fundamental tax relief was necessary to generate strong growth and restore confidence -- and that it had to be long-lasting.  I remember the conversations we had both before and shortly after I took this job where we agreed that the tax code could be employed to put the economy on a path for economic growth and job creation.

What the President understood was that if we could keep marginal tax rates low and reform our tax system in ways that would encourage investment, the U.S. economy would take off.  In particular, the President believed that if we could lower the cost of capital, we would encourage higher investment, which would lead to greater capital formation, and increased job growth.

This was really an historic, landmark moment: for the first time in many years, a President put on the table a discussion about the role of capital in our economy and how the tax code could be put to work to make this economy work better.  First, we brought tax rates down for all Americans, making sure that individuals had more money in their pockets. Then, in 2003, we worked cooperatively with leaders in Congress to pass the tax plan we needed with provisions to reduce the tax on capital gains and on dividends paid to shareholders to 15 percent.

Since the spring of 2003, when the President signed this tax relief legislation into law, our economy has tested the President's view that if we put more money in the pockets of working Americans and reduce taxes on investment, the result would be a stronger economy and millions of new jobs. The results have been clear.  The U.S. economy today is performing as strongly as anyone could have anticipated: 4.2 million new jobs have been created.  Real per capita income is up and the equity markets have rebounded.  A couple of weeks ago we learned that the American economy grew at an impressive 3.8 percent rate for the third quarter of this year, making it the tenth straight quarter that the American economy has grown at a healthy rate of 3.3 percent or more. 

It's no coincidence that it was ten quarters ago that the President's tax reform plan took effect.

Lower taxes – especially those that lower the cost of capital and encourage investment -- combined with sound monetary policy from the Federal Reserve, set American entrepreneurs free to do what they do best: innovate, invest, grow the economy, and create jobs.

The debate in Congress today is whether to keep or jettison key ingredients to continued economic growth and job creation such as reduced tax rates on capital gains and dividends.  To me, the choice is obvious: failure to extend these tax reforms would take us in the wrong direction, and would have negative consequences for our economy.  Americans expect and deserve that we do everything we can to keep our economy growing, promote innovation, spur the creation of new and better jobs and keep the promise of a more prosperous future for all Americans.

President Bush's plan to lower the cost of investing through reduced rates on capital gains and dividends has resulted in broad benefits to the U.S. economy overall and for the tens of millions of Americans who own stocks either directly or through mutual funds.  The number of households owning equities through employer-sponsored plans – which often offer stock mutual funds as investment options – has grown from 5.2 million in 1999 to nearly 38 million today.

The American Shareholders Association estimates that S&P 500 shareholders will receive $201 billion in regular dividend payments this year – a 36% increase over 2002, the year before the President's tax reductions on dividends took effect.  If you combine the tax savings to investors with the increased dividends, S&P shareholders alone received an additional $98.7 billion from America's corporations than before the tax plan.

The dividend tax reduction reversed a 25-year decline in companies paying dividends to their shareholders.  Seventy-seven percent of S&P companies now pay a dividend, nearly a 9 percent increase.

More than just lowering the tax burden, reducing the tax rate on dividends had an additional, fundamental benefit by reducing the disparity in the tax treatment between debt and equity financing.  Before the reform, the bias in capital markets was tilted toward debt financing because of the tax code.  While there is still a bias toward debt financing – only elimination of the double-taxation of dividends would completely eliminate the bias – it has been significantly reduced.  This reform is helping to reduce distortions in capital markets and is helping more companies to make more sound financing decisions by reducing distortions caused by the bias in the tax code.

One argument that was made against the President's tax plan was that it would be too expensive, costing the government too much revenue.  But the facts since 2003 have shown that the economic growth spurred by the President's tax policies have significantly swelled government coffers.  In January 2004, for example, the non-partisan Congressional Budget Office projected that 2004 revenue would be $1.817 trillion.  Actual revenue came in $63 billion higher – half a percent of GDP.  In January 2005, CBO projected 2005 revenue would be $2.057 billion; actual revenue came in $96 billion higher – 0.7 percent of GDP.

We still have a federal budget deficit – one that is too large and that the President is firmly committed to reducing.  But our deficits are not the result of lower receipts – tax revenue continues to be strong.  Our deficits are overwhelmingly the result of the recession we inherited and necessary increases in spending to fight the war on terror.  Deficits matter and one of our highest priorities is to achieve the President's goal of reducing our deficit to below 2.3 percent of GDP by 2009.  Even in the face of increased costs to deal with this summer's hurricanes, I am confident that we will achieve this goal.

What is irrefutable is that the President's economic plan has resulted in an economy that is the envy of the rest of the world. Today we enjoy strong economic growth, job creation, and increased tax revenues.

As Congress considers tax reconciliation legislation this week, we should not walk away from these successful reforms.  We should not raise the cost of investing here at home when we expect American companies to compete in the global economy.  I strongly urge Congress to extend these reforms and keep this economy the most dynamic in the world.

I hope you don't assume that because we were able to successfully use the tax code to spur growth in our economy that I'm pleased with America's tax code.  As many of you here today are aware, our tax code is not where it should be.  After nearly three years as Treasury Secretary I have yet to find anyone who is happy with the tax code – unless you are in the tax preparation business, that is.  Just to navigate it, millions of Americans have to enlist professional help. It's a startling fact that in the United States today we more tax preparers than firemen or policemen! 

You've heard many of the statistics – billions of hours of paperwork for tax filers and businesses, $140 billion dollars in lost time and money just trying to comply with our increasingly unwieldy tax code.  This is a drag on economic growth in America and an unnecessary burden we all share.

I have recently received proposals from the President's Tax Reform Panel intended to simplify and streamline the tax code.  I commend the work they did under the leadership of the two co-chairmen, former Senators John Breaux and Connie Mack.  My colleagues and I at Treasury are reviewing their recommendations now and I will make a recommendation to the President.

During this process, we welcome your good insights and opinions.  America deserves a tax code that meets the President's goals for fairness and simplicity – and, as I've argued today – for economic growth.

Thank you again for inviting me here today.  I would be happy to take any questions you might have.