[Congressional Record Volume 149, Number 5 (Monday, January 13, 2003)]
[Senate]
[Pages S225-S226]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                  INVESTORS ARE KEY TO ECONOMIC GROWTH

  Mr. KYL. Mr. President, on January 7, I reintroduced the ``Contract 
with Investors,'' which proposes a number of changes to the tax code to 
spur investment and encourage economic growth and job creation.
  Investment, especially by individuals, is the lifeblood of the U.S. 
economic system. They key to fostering robust economic growth, rather 
than the anemic growth we are seeing right now, is to eliminate the 
disincentives, the high tax rates, that discourage individuals from 
investing. Once individual investors return to the stock markets, or 
are encouraged to start up, or invest in existing, small businesses, we 
will get the growth that creates new, good jobs.
  The first element of my proposal repeals from the 2001 tax-relief law 
the sunset provision that was required by arcane Senate budget rules. 
The prospect of taxes reverting back to their 2001 levels in 2011 sends 
a signal to businesses and investors that tax increases are in their 
future, and this dampens investment. Furthermore, a dramatic tax 
increase in 2011 will devastate our economy.
  Next, I propose to accelerate the remaining marginal rate reductions 
from the 2001 law, moving the 2004 rate reductions to this year and the 
2006 reductions to 2004. Lowering these rates benefits all taxpayers, 
and is the key to encouraging individuals to invest and take the 
economic risks that will create jobs. In our progressive income tax 
system, the marginal rate is the rate at which a person's last dollar 
of income is taxed. This means that a person who works harder and 
longer and earns more has those additional earnings taxed at the 
highest rate for which he or she qualifies. Reducing marginal rates 
encourages taxpayers to work harder and longer because they will not be 
taxed as much on that extra income. On the same principle, it makes 
sense to accelerate the planned tax-rate reductions. Phased-in 
reductions give taxpayers an incentive to put off income-producing 
activity into the future, when rates are scheduled to be lower. 
Accelerating the reductions gives taxpayers the incentive to engage in 
that income-producing activity immediately.
  This also gives quicker relief to small businesses, which are 
typically taxed not at corporate, but at individual rates. Small 
businesses account for most new jobs and half of the output of our 
economy. Currently, the maximum income tax rate for C corporations is 
35 percent; once the individual rate cuts are fully implemented, the 
top tax rate for individuals will also be 35 percent, instead of the 
current 38.6 percent. This will eliminate a penalty unfairly imposed on 
small businesses and enable them to expand and employ more workers.
  The next element of my plan accelerates to 2005 repeal of the death 
tax, the estate and generation-skipping transfer taxes. The death tax 
is unfair and counterproductive and it must be permanently eliminated. 
A 1998 study by the Joint Economic Committee concluded that the 
existence of the death tax during the last century has reduced the 
amount of investors' capital in the economy by nearly half a trillion 
dollars. The same study estimates that, by repealing the death tax and 
putting those resources to better use, as many as 240,000 jobs could 
have been created over seven years and Americans would have had an 
additional $24.4 billion in disposable personal income.

  In 2001 testimony before the Senate Finance Committee, Dr. Wilbur 
Steger, the president of Consad Research Corporation and a professor at 
Carnegie Mellon University, testified that immediate repeal of the 
death tax would provide a $40 billion automatic stimulus to the 
economy, based on estimates of the amount of net unrealized capital 
gains that would be ``unlocked.'' Many Americans choose to hold on to 
their assets until death in order to obtain for their heirs a ``step-
up'' in basis. Getting rid of the death tax will encourage Americans to 
sell assets before death, hence my term ``unlocking.'' Repeal also 
removes the strongest disincentive to business investment and expansion 
that faces older business owners. After all, why would people in their 
golden years expand their businesses, when the federal government is 
poised to confiscate a large share upon their death?
  Under current law, the death tax will go down to zero in 2010 but 
reappear thereafter, at exorbitant 2001 levels, thus adding significant 
complexity to future death tax planning, increasing costs that are a 
drag on economic activity, and retreating from a principled rejection 
of this unfair tax. This is unacceptable. Until the death tax is gone, 
family business, farms and ranches must still pay for expensive life 
insurance policies, death tax planners, and tax attorneys. These 
expenses, wasted resources that could be put to much more productive 
use, total more than $12 billion a year, according to Consad Research 
Corporation. My bill would, as I said, permanently repeal the death tax 
in 2005, thus allowing all Americans two years to plan for a future in 
which the federal government no longer taxes the death of its citizens.
  The Contract with Investors also addresses capital gains. It provides 
for maximum taxation of individual capital gains at a rate of 10 
percent, which is half the current rate. Ideally, this

[[Page S226]]

tax should go the way of the death tax. The capital gains tax is a form 
of double taxation that penalizes risk-taking and entrepreneurship. 
Short of eliminating this tax, a solution endorsed by many economists, 
including Federal Reserve Chairman Alan Greenspan, Congress must enact 
a substantial and permanent reduction in the capital gains tax rate to 
stimulate new investment and more productive use of resources for both 
the short-term health of our economy.
  According to a recent study by the American Council for Capital 
Formation, American taxpayers face capital gains tax rates that are 35 
percent higher than those paid by average investors in other countries. 
Furthermore, the United States is one of a small number of countries 
that requires a holding period for an investment to qualify for 
preferential capital gains treatment. Reducing the capital gains rate 
will promote the type of productive business investment that fosters 
growth and creates high-paying jobs. Lowering rates will aid 
entrepreneurs in their effort to make advances in products, 
technologies, and services that people want and need.
  The fifth component of the Contract with Investors modernizes the 
capital loss limitation of the tax code by increasing the amount of 
capital loss an individual may deduct against ordinary income from the 
current $3,000 to $10,000, and by indexing this amount for inflation. 
The capital loss limitation was set arbitrarily more than 25 years ago, 
and would have grown to $10,000 if it had been indexed for inflation 
when enacted. Modernizing this provision will allow investors to move 
out of unproductive assets or unfavorable investments, and use the 
profits to reinvest, save, or spend, as they choose.
  My bill also encourages savings. It accelerates the increase in 
amounts that may be contributed to certain tax-qualified retirement 
savings plans, and raises the age at which mandatory distributions must 
begin. Increasing the annual, maximum individual retirement account, 
IRA, contribution to $5,000 and the annual, maximum 401(k) plan 
contribution to $15,000 will enable American workers to save more for 
the future by investing in businesses. Increasing from 70.5 to 75 the 
age at which seniors must begin making annual withdrawals from this 
tax-deferred retirement accounts will allow seniors who are approaching 
this arbitrary age to choose whether to maintain their investments, 
rather than being forced to divest.
  Finally, the Contract with Investors eliminates the double taxation 
of dividends by excluding from gross income 100 percent of dividends 
received by individuals. Currently, corporations pay income taxes on 
their profits. Their investors are forced to pay income tax at the 
highest marginal rate applicable on amounts that corporations 
distribute to them in the form of dividends. The National Center for 
Policy Analysis has calculated that the combined tax rate on corporate 
profits is approximately 60 percent.
  My bill will eliminate the tax imposed on individuals receiving 
dividends from domestic C corporations, which will produce higher 
returns on dividend-yielding equity investments. It will also remove 
the disincentive for corporations to pay dividends and put equity 
financing on the same tax-footing as debt financing. Eliminating the 
tax bias against equity will improve corporate governance at a time 
when the public is demanding better practices at American firms. It 
will reassure investors who may be concerned about companies taking on 
too much debt or making unwise or unnecessary investments with excess 
cash. Eliminating the double taxation of dividends will, like the other 
elements of my plan, encourage investment and foster economic 
expansion.
  Finally, I have included five provisions under ``Sense of the 
Senate'' language. I believe that the Senate must act on these issues 
and I stand ready and willing to assist my colleagues in solving these 
problems.
  First, Congress should pass legislation to safeguard American 
workers' pension and retirement accounts. Last Congress, the Finance 
Committee unanimously passed out of committee such a bill. The Senate 
and the House of Representatives should act quickly to pass similar 
legislation as soon as possible.
  Second, Congress should modernize this country's international tax 
provisions to permit U.S. companies to better compete internationally. 
Our tax code places U.S. companies and the investors who own them at a 
distinct competitive disadvantage. Congress must modernize these 
provisions and move towards ending the current practice of taxing 
profits earned outside the boundaries of the United States.
  Third, Congress must take the trouble to purge redundant, outdated, 
and unscientific regulatory burdens on investors and U.S. companies. 
Congress is quick to pass onerous new laws but slow to repeal them. 
This is an abdication of our responsibility as legislators. Before 
placing new burdens on investors and businesses, Congress should be 
required to perform a cost-benefit analysis and institute performance 
criteria to evaluate these new burdens on U.S. businesses and 
investors.
  Fourth, Congress should enact meaningful tort reform as soon as 
possible.
  Finally, Congress should enact meaning tax reform that simplifies the 
Internal Revenue Code and reduces the depreciation recovery periods 
that businesses are forced to use to recover the cost of capital 
investments.
  Now is the time for bold action. A ``Contract with Investors'' is 
long overdue. I have laid out my principles. I look forward to future 
hearings and discussions with my colleagues. It's time to get working.

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