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Chairman Cox Sends Tax Reform Letter to the President
Tuesday, August 13, 2002
President George W. Bush
The White House
1600 Pennsylvania Avenue
Washington, DC 20500
Dear Mr. President:
On behalf of the House Policy Committee, thank you for organizing today's Economic Forum, which will help remind people that the economic fundamentals are strong and that prospects for growth remain good.
The Committee met with Secretary of the Treasury Paul O'Neill July 25, 2002, when he previewed some of the good news about the economy. The Committee also considered policies the Administration and Congress could adopt to reform elements of the tax code that unintentionally impede growth and hurt investors.
One reform the Administration should undertake immediately is the indexation of capital gains to inflation. As they are currently calculated--ignoring inflation--investors can be taxed on a capital gain that is actually a loss in real terms. For example, an investor who made a capital investment of $1,000 in 1981 and then sold it for $2,000 in 2001 was taxed on a $1,000 gain, even though $2,000 in 2001 was worth the same as $1,000 was in 1981. To say such an investor has experienced a gain is like saying that a man who cuts a piece of pie in half has experienced a gain, for now he has two pieces of pie.
Even in less extreme cases, failing to index capital gains to inflation has the perverse effect of penalizing long term investment--the very investment that is most conducive to strong economic growth. Common sense dictates that a taxable gain should be measured as the increase in goods and services--not green-tinted paper--for which an investment can be traded.
Many elements of the tax code which were once calculated in nominal terms, such as income tax brackets, are now indexed to inflation. Since the Internal Revenue Code does not specify whether capital gains should be calculated in real or nominal terms, the Administration could index to inflation simply by issuing a Treasury regulation--without legislation. This could be done at once, providing timely relief to investors and an immediate boost to the economy.
In addition, Secretary O'Neill reminded the Committee that the double taxation of dividends remains one of the most destructive elements of the tax code. Unlike most nations, the United States taxes corporate profits paid out as dividends at the full corporate level, and then again at the full individual level. The resulting effective tax rate of up to 61% (not counting state and local taxes) has virtually stamped out dividends as a way of rewarding investors for risk. Today, most public companies pay small dividends, or eschew them altogether.
Because of the confiscatory taxation of dividends, any non-tax exempt investor must look to the sale or collateralization of his or her stock as essentially the only means of achieving the desired return on investment. As a result, when the overall stock market sours, even a healthy company cannot protect its investors from loss. This needlessly compounds the negative effects on the overall economy from a downturn in the stock market.
As for concerns with the revenue effects of these two proposals, it always bears repeating that a strong economy is the only way for the government to ensure sustainable fiscal health. Tax provisions such as the inflation tax on investment and the double tax on dividends, which seem to raise revenue, actually reduce revenue by slowing economic growth. The Policy Committee looks forward to working with you, Mr. President, to fix these and other elements of our tax code that hurt individual investors and make our economy less competitive. By working together, we are confident that we will be able to build on the strong fundamentals you are highlighting in Texas, and help make the American economy stronger still.
Sincerely,
[Signed]
Christopher Cox
Chairman
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