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Coalition Calls for Extending Capital Gains & Dividend Tax Cuts

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Honorable Roy Blunt
Majority Whip
House of Representatives
H-329, The Capitol
Washington, DC 20515

Dear Majority Leader Blunt:

On behalf of the millions of taxpayers, small businesses, shareholders, and senior citizens represented by our organizations, we urge you to immediately bring up a vote on extending the very successful capital gains and dividend tax rates and then move to conference the tax bill with the Senate version before the end of the year. It is absolutely crucial these provisions are extended now to ensure the continued robust economic growth the nation is currently experiencing.

As you know, the dividend and capital gains tax rates will not expire until December 31, 2008 and some people believe that there is time to extend these rates and thus no urgent need to do it at this time. We strongly disagree with this analysis.

Failure to extend these rates now will result in less investment and hence job creation since it takes several years for investments to pay off. Under this scenario, firms will be facing higher tax rates when the investments pay off which results in a significantly higher cost of capital. As a result, less investment will slow job creation.

This is not just theory. According to a recent Treasury Department report, the income, capital gains, and dividend tax cuts reduced the marginal effective tax rate on investment by 17.4 percent. As a result, the cost of capital significantly decreased which led to new investment. In fact, this week the Commerce Department reported Gross Domestic Product (GDP) was revised upward in the third quarter to 4.3 percent. Driving this growth is new investment, which has increased 9.1 percent per quarter since the 2003 tax cuts.

To place this number in context, investment is growing more than twice as fast as the economy and nearly 50 percent faster than the long run average since the 2003 tax cut. Failure to extend the capital gains and dividend tax rates at 15 percent will slow this growth down over time and result in less job creation.

Immediately following the tax reduction, the stock market and new investment exploded. As factory orders became backlogged, firms hired more workers. Today's employment report showed 215,000 jobs were created in November and 4.46 million since the tax cut was enacted. This strong growth is occurring despite the economic damage caused by three hurricanes in the southern region of the country. Clearly, the resilience of the U.S. economy is like no other in the world.

This economic resilience can be attributed to the low tax rates on investment and an environment which is conducive to growth. Yet, the failure to extend these rates now will produce an opposite effect of what occurred after the tax cuts were enacted. Investment will slow, stock market gains will be muted, and ultimately job creation will fall off. If Congress fails to extend the capital gains and dividend tax rates, we expect this slowdown to show up in the data starting the in the summer of 2006.

In addition to new investment, the tax cuts on capital gains and dividends increased the after tax return on equities and have produced more than $4 trillion of new shareholder wealth. Total net worth for American households has increased $10.5 trillion since the tax cut according to the Federal Reserve.

The 25-year decline of dividend paying companies has been reversed. A record number of companies are increasing their dividends. Shareholders of S&P 500 companies have received more than $100 billion of increased dividends and tax savings as a result of the tax cut. This money is being reinvested back into the economy and providing the liquidity for firms to make these new investments. Again, this effect will also slow if Congress fails to enact the extension of the capital gains and dividend tax rates.

Clearly, these provisions need to be made extended now. We urge you to pass this legislation immediately upon returning from recess. We further urge you to ensure a speedy conference with the Senate version to ensure the extension can be signed into law before the beginning of the New Year. No other act of Congress will have such an economic impact. Failure to act will be detrimental to growth, income, and jobs. Passage will boost growth, incomes, and jobs.

Sincerely,

Jim Martin, 60 Plus

J. William Lauderback, American Conservative Union

Dick Patten, American Family Business Institute

Daniel Clifton, American Shareholders Association

Michelle Korsmo, Americans for Prosperity

Grover Norquist, Americans for Tax Reform

Roland Boucher, United Californians for Tax Reform

Terrence Scanlon, Capital Research Center

Andrew Quinlan, Center for Freedom and Prosperity

Chuck Muth, Citizen Outreach

David Keating, Club for Growth

Thomas Schatz, Council for Citizens Against Government Waste

Mallory Factor, Free Enterprise Fund

Keri Houston, Frontiers of Freedom

Matthew Kibbe, FreedomWorks

Laird Maxwell, Idahoans for Tax Reform

Tom Giovanetti, Institute for Policy Innovation

Richard Falknor, Maryland Taxpayers Association

John Berthoud, National Taxpayers Union

Scott Pullins, Ohio Taxpayers Association

Scott LaGanga, Property Rights Alliance

Karen Kerrigan, Small Business & Entrepreneurship Council

This letter is available in PDF