[Congressional Record Volume 150, Number 76 (Thursday, June 3, 2004)]
[Senate]
[Page S6456]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. KYL:
  S. 2503. A bill to make permanent the reduction in taxes on dividends 
and capital gains; to the Committee on Finance.
  Mr. KYL. Mr. President, I join my colleagues in celebrating the first 
anniversary of the Jobs and Growth Tax Reconciliation Act of 2003, 
which was signed into law by President Bush on May 28, 2003. Also, I 
want to announce that today I am introducing legislation to make the 
dividends and long-term capital gains tax cuts permanent.
  It has been one year since Congress and President Bush joined 
together to enact pro-growth, supply-side tax cuts. Now, since some in 
the Senate are proposing that we repeal the tax cuts--this would be one 
of the largest tax increases in history--let's review the impact these 
cuts have had on our economy.
  The 2003 tax cuts have triggered the fastest growing economy in two 
decades. Real gross domestic product grew at an annual rate of 8.2 
percent in the third quarter of 2003, 4.1 percent in the fourth 
quarter, and 4.4 percent in the first quarter of 2004. If we sustain 
this pace, our economy will double in 13 years. When the tax cuts were 
enacted last year, the national unemployment rate was 6.3 percent. 
Today, it has dropped nearly 11 percent to 5.6 percent, which is lower 
than the average unemployment rate of the 1970s, 1980s, and 1990s. A 
growing economy means good, high-paying jobs and a better quality of 
life for all Americans.
  I want to draw my colleagues' attention to research published by the 
National Bureau of Economic Research (NBER)--the Nation's leading 
nonprofit economic research organization. This study demonstrates that 
the 2003 tax cuts corrected a terrible mistake we made in 2001 when we 
phased in the marginal rate cuts. The phase-in of the 2001 tax cuts 
prompted workers and firms to delay work until the tax cuts were fully 
implemented. Employment, output, and investment actually fell in 
response to the phased-in tax cuts.
  The NBER study found that, ``Just as the phased-in nature of the 2001 
tax law may have delayed production and employment, the immediate tax 
relief included in the 2003 law may have contributed towards the 
increased pace of economic activity in the second half of 2003.'' I am 
confident that, as more economic data comes in and as the 2003 tax cuts 
are studied further, we will find that the 2003 tax cuts are directly 
responsible for the economic growth we are seeing today.
  The NBER study demonstrates that individuals really do delay economic 
activity in anticipation of lower future tax rates. It also 
corroborates the theory that high marginal tax rates cause individuals 
to restrict economic activity in order to minimize the tax burden 
imposed on their next dollar earned. Because the tax cuts were 
accelerated in 2003, individuals had an incentive to work harder and 
longer immediately because their next dollar of income would be taxed 
at a lower rate.
  Among the taxpayers benefited by the reductions in the individual 
rate are America's small businesses. The top individual rate is often 
called the small business rate because most small businesses are 
organized as pass-through entities, which pay at individual rates. 
Owners of pass-through entities, including small business owners and 
entrepreneurs, comprise more than two-thirds, about 500,000, of the 
750,000 tax returns that benefited from speeding up the reduction in 
the top tax bracket. These small business owners received 79 percent, 
about $10.4 billion, of the $13.3 billion in tax relief from 
accelerating the reduction in the top tax bracket to 35 percent.
  The task for us now is to make the individual rate reductions 
permanent. If Congress fails to act, the tax cuts will expire at the 
end of 2010. The bottom rate would increase from 10 percent to 15 
percent, an increase of 33 percent; the top rate would increase from 35 
percent to 39.6 percent, an increase of 11 percent. The effect such tax 
increases would have on our economy would be devastating.
  Not only did Congress and President Bush work together to bring down 
individual income tax rates, but we also reduced the tax on dividend 
distributions and long-term capital gains. Before the 2003 tax cuts, 
our tax code actually discouraged dividend payouts. The 2003 tax cut 
lowered the tax rate imposed on dividends from 38.6 percent to 15 
percent through 2008. Before 2003, corporate earnings were taxed once 
at the corporate level, 35 percent, and again at the individual rate, 
as high as 38.6 percent, meaning they were double-taxed. It made no 
sense for investors to seek out dividend-paying stocks, from a tax 
perspective.
  While dividends are still double-taxed, the tax penalty is greatly 
reduced. This has made dividend-paying stocks more attractive to 
investors, which has helped companies raise capital to expand and grow 
their businesses. Further, because dividends must be paid from cash, 
companies that pay dividends must have actual profits, thus making it 
more difficult for companies to hide financial mismanagement.
  Some of my colleagues want to repeal the dividend tax cut. This is 
obviously misguided, since we have strong evidence that the dividend 
tax cut has worked. Since the 2003 tax cut was signed into law, 374 
companies on the S&P 500 pay dividends--an increase of 22 companies. 
Companies have increased dividend payments to shareholders by 40 
percent, reversing a two-decade decline. The Dow Jones Industrial index 
has risen more than 1,400 points since the 2003 tax cuts were signed 
into law.
  Similarly the capital gains tax cut has also encouraged economic 
growth. It reduced the tax imposed on long-term capital gains from 20 
percent to 15 percent. This has made it more attractive for individuals 
to risk their hard-earned money by investing it in businesses. The 
result is that it is easier for businesses to raise needed capital to 
expand and create new jobs. Stock market gains, the strong GDP we have 
experienced, and falling unemployment all indicate that the economy has 
recovered.
  Now, to help our economy to continue to grow and create new jobs, the 
dividend and capital gains tax cuts must be made permanent. If we allow 
the dividend rate to return to the individual rate, we will increase 
taxes on dividends by 62 percent. Allowing the capital gains rate to 
return to 20 percent will be a 25 percent tax increase. We must make 
the 15 percent rate for each permanent, and then we must work to reduce 
both the dividends and the capital gains rates to zero, so that we 
eliminate the double-taxation of corporate earnings. The Senate bill 
actually would have brought the dividend tax rate to zero for three 
years, but the agreement that we worked out with the House was to tax 
dividends at 15 percent. The dividends and capital gains tax relief 
will expire in 2009.
  The most important thing we can do next year is make the 2003 tax 
cuts permanent. Today I am introducing legislation that will make the 
dividends and capital gains tax relief permanent. I will work to make 
the individual income tax rate cuts permanent as well. To allow the tax 
cuts to expire--or worse, to seek to higher taxes at the very time our 
economy has pulled out of the recession and is growing strong--would be 
unthinkable.
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