|
The Heart of the Economy
By
JOHN W. SNOW
February 15, 2006; Page A16
By nearly every conventional statistical measure, the
American economy is performing very well today -- continued economic
growth; a strong employment market; household wealth is at historic
highs; inflation has been kept in check; interest rates are still low by
historic standards.
But this was not the case three years ago. The economy
was still struggling with the head winds from the economic downturn that
began in 2000, the impact of the terrorist attacks, and the excesses of
the late '90s -- seen most glaringly in the bursting of the
equity-market high-tech bubble.
While officially the recession had ended in late 2001,
the pace of the recovery was too slow. Growth was anemic, business
confidence low and -- of critical importance -- capital investment was
way down. As a result job growth was nonexistent.
![[Climate for Growth]](../../images/ED-AD952_snow_20060214194811.gif)
President Bush recognized that something needed to be
done to overcome those headwinds and, in particular, to create a more
favorable climate for capital investment that would result in job
creation. To do so he sent Congress far-reaching proposals to encourage
capital formation by lowering taxes on investment returns. Congress
responded with the Jobs and Growth Act, which was signed into law in May
2003.
Since then we have seen a remarkable turn-around in the
economy. After nine consecutive declining quarters of real annual
business investment, we have had 10 straight quarters of rising business
investment. This business expansion led to a substantial increase in
employment. In the intervening period, some 4.7 million new jobs have
been created and the unemployment rate -- 6.3% in 2003 -- today stands
at 4.7%, lower than the average of the 1970s, '80s and '90s.
While many factors contributed to the improved
performance of the economy, the tax reductions on capital have been at
the heart of the progress we have seen.
The president's proposals didn't simply provide a
short-term stimulus. They did provide a stimulus, but they also did far
more: By lowering the cost of capital, the president's proposals
improved the inherent efficiency of the economy. We know that you always
get less of something you tax. By lowering the taxes on capital, the
proposals encouraged increased long-term investment. Increased long-term
investment in turn improves the long-term outlook of the economy. It
makes the economy more productive. With additional capital, labor output
rises. And with rising labor output the demand for labor increases.
Sound monetary policy from the Fed complemented the tax
cuts, of course. The combined effect was essentially an unleashing of
the economic power that rises so naturally in a free-market economy.
That power comes, at its roots, from risk-takers and investment capital.
With 4.7 million new jobs created and fully half of all
households benefiting from the lower tax on dividends alone, there can
be no doubt that lower taxes on investment benefited the majority of the
American people quite directly.
It concerns me that some in Congress are today looking
to increase taxes on capital gains and dividends. Worse yet, there have
been suggestions that the administration should choose between
protecting the middle class from the Alternative Minimum Tax and
extending the low rates on capital gains and dividends.
In both cases, the middle class is at serious risk;
choosing one or other is not an option. An AMT fix must be approved by
the Congress for 2006 and eventually find a permanent remedy through
fundamental tax reform, and the lower rates on investment must hold.
Increasing those taxes would damage economic growth, hurt job creation,
and raise taxes on half of all American households.
* * *
Keep in mind that the typical investor today, according
to the Securities Industry Association, is a middle-class person saving
for retirement with a household income of about $65,000.
If Congress fails to extend the 15% rate on capital
gains and dividends, what harm will it bring to our economy? To me, the
answer is very straightforward: Raising tax rates on capital gains and
dividends would strike at the heart of the economy with damaging
long-term effects on economic growth. A slowdown in investment would be
inevitable, and a slowdown in job growth almost certain to follow.
The role of government is to put in place the
foundations for American innovators and workers to do the real work that
propels the economy forward. A pillar of that foundation is the low tax
rates on capital gains and dividends that ultimately translate into
higher living standards for all Americans. Congress owes it not just to
the 91 million Americans who own equities, but to all Americans who
benefit from a strong and growing economy to keep this pillar of growth
in place and extend the 15% rate on capital gains and dividends.
Mr. Snow is the U.S. Treasury secretary.
|
Republican
National Hispanic Assembly
