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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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