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81 IRET Congressional Advisory 1 (1999)

handle is hein.taxfoundation/iretcgadv0078 and id is 1 raw text is: IRET May 13, 1999 No. 81 SENATOR MACK'S PRO-GROWTH TAX PLAN Senator Connie Mack (R-FL) has put together a generally laudable tax reduction plan that contains Corporate income is subject to an extra layer of tax compared to other earnings of saving. The corporation pays tax on its profits. If a portion of the profit is paid out as a dividend, the income is subject to an additional tax on the shareholder's tax return. If the after-tax earnings are retained for reinvestment, which boosts the share price, there is a capital gains tax on the increase when the shares are sold. Either way, corporate income is effectively taxed twice.1 Current law provides a partial offset to this excess layer of corporate tax, and to the capital gains on non-corporate assets, by means of a reduced tax rate on gains on assets held more than one year. There is no offset for the double taxation of dividends paid to shareholders. The Mack several pro-growth tax changes, provision aimed at reducing the marriage penalty for income-tax-paying couples. Cut capital gains taxes to 7.5% and 15%, and index for inflation; cut dividend tax rates to 7.5% and 15%. as well as one Senator Connie changes... The rate cuts. Senator Mack's proposal would reduce the tax rates on long term capital gains and dividends to a top rate of 15% (for people in income tax brackets above 15%) and a bottom rate of 7.5% (for people in the 15% income tax bracket). The capital gains cut would be effective on January 1, 2000. The dividend rate cut would be phased in from 2001 to 2005. Currently, long term capital gains are taxed at 20% (for people in higher tax brackets) and at 10% (for people in the 15% bracket). Dividends are taxed at ordinary tax rates, up to 39.6%. The capital gains and dividend tax relief would lower the cost of capital and increase the incentive for entrepreneurial risk-taking, spurring additional capital investment, which, in turn, would increase productivity, wages, and employment. Institute for Research on the Economics of Taxation proposal would Mack (R-FL) reduce the excess tax on capital gains further, and extend the same relief to dividends. The extension to dividends would eliminate the current tax bias against dividends as compared to retained earnings/capital gains under the current system. The Treasury recommended eliminating this bias in its 1992 study of integration of individual and corporate tax systems.2 The Mack proposal does this in an appropriate manner. Indexing the basis. Senator Mack's proposal would also adjust the purchase price of stocks, bonds, and other financial assets for inflation, reducing the calculated nominal gains subject to tax. Reducing capital gains taxes is always a good idea, because they are double taxation to begin with. It should be stressed, however, that taxing real gains is as bad as taxing the gains due to inflation. Furthermore, while we are great fans of income tax indexing in general, there may be better ways of dealing with the effect of inflation on capital assets. Indexing the basis of capital assets is a complicated procedure, involving substantial has put together a generally laudable tax reduction plan that contains several pro-growth tax IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www.iret.org

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