Preserve Jobs By Preserving Cap Gains Cut

Investors Business Daily
By Margo Thorning
February 29, 2008

(PDF)

Fast on the heels of an economic stimulus package of tax rebates and business tax breaks, Congress is exploring additional tax and other economic incentives to spark the fizzling economy.

Tinkering with short-term stimulus packages alone will not preserve jobs and stave off a possible recession. Congress must look beyond short-term stimulus and toward long-term tax and economic policy that generates real growth.

One way Congress can send a strong signal to Wall Street and Main Street and build an effective bulwark against reecession and proteect Americcans’ jobs is to act now to make the soon-to-expire 2001 and 2003 cuts in capital gains and dividend taxes permanent.

Despite the typical knee-jerk reaction from many policymakers and presidential candidates that such reductions benefit only the wealthy, the reality is they benefit more middle-class Americans.

Allen Sinai, a leading global economist, finds that in spite of the 9/11 terrorist attacks, two wars and two major hurricane strikes on the Gulf Coast, which hould have een economy busters, the cuts in individual, capital gain and dividend taxes passed in 2001 and 2003 helped boost jobs.

Losing Jobs

In all, those five tax cuts helped real GDP grow at an average of 1.6% from 2001 to 2003, increasing to 3.2%from 2003 to 2006. Without the tax cuts, that growth would have been otherwise blunted in the face of terrorist strikes on American soil, two costly wars and two natural disasters.

In fact, Dr.Sinai’s research reveals GDP growth could have been as much as 0.7% less each year and unemployment would have been as much as 1.2 percentage points higher from 2001 to 2006 had those tax cuts and government spending increases not been passed.

Put into human terms, that translates into millions of Americans who found or held onto jobs that would never have been created or preserved had individual, capital gain, dividend and business taxes not been cut to allow such growth.

That also means millions of Americans will lose their jobs and the impending recession will deepen if Congress fails to renew the tax cuts. But presidential candidates looking to score easy points with disgruntled workers by blasting “tax cuts for the rich” seem to ignore the fact those cuts in capital gain and dividend taxes directly benefit the average worker’s retirement account and creates more jobs at better pay for middle-class Americans.

In fact, after years of the income of wealthier Americans growing faster than the income of poorer Americans,what are now being blasted as “tax cuts for the rich” actually helped workers’ real wages begin to catch up. With the tax cuts fueling economic growth, real income per capita for workers grew by $2,500 per person in just five years,from $25,698 in 2001 to $28,135 in 2006.

More To Do

More jobs, more income and greater competition for workers all spring to life by reductions in capitals gain and dividend taxes.

Sinai’s well-respected research indicates that without the 2001 to 2004 tax cuts, the 9/11 terrorist attacks, skyrocketing oil prices, two major hurricanes and two expensive wars could have led to painful job losses and reductions in real wages.

Instead, the economy grew, giving more Americans more jobs at higher pay, pushing unemployment down to just 4.4%.

Now, in the face of a possible recession, letting those tax cuts expire would be an invitation to a continued sluggish economy. Letting those tax rates rise again would drive investment out of our economy just when middle-class Americans need it most.

While a short-term economic stimulus recently signed into law is a start, Congress may need to do more. We may need a stimulus package larger than the 1%-of-GDP package signed by President Bush last week and closer to the 2%-to-2.5%stimulus like that provided by the 2001-2004 tax cuts and spending increases.

Simply voting to make those cuts permanent would reassure investors and preserve jobs just when middle-class Americans need it most.

Thorning is senior vice president and chief economist of the American Council for Capital Formation.