Capital Formation Newsletter
September-October 2005, Vol. 30, N0. 5

Don’t Let the Sun Set on U.S. Savings and Investment

ACCF in the News

Kyoto Protocol’s Impact on EU Emissions and Competitiveness

ACCF and Marshall Institute Hold Joint Policy Dinner

ACCF Chief Economist Participates in CEA Roundtable

ACCF Hosts 138th Economic Policy Evening

(PDF Version)

Don’t Let the Sun Set on U.S. Savings and Investment

The tragic result of violent hurricanes and the nation’s ongoing efforts in Iraq has led to record-level spending from Capitol Hill, leaving many pondering ways to finance our domestic and international commitments. Some lawmakers have proposed curbing important tax reduction policies that help investment and productivity flourish. Congress must not lose sight of and should remain committed to the sound policies that drive the U.S. economic engine and make it a global competitor.

As Congress grapples with tax and spending proposals to finance the challenges of war and Mother Nature's aftermath, it must remain steadfast in committing to growing a strong and vibrant economy. One paramount step to such growth is to extend the 15% tax rate on dividends and long-term capital gains through the end of 2010 as a part of the 2006 budget reconciliation package.

Extending the 15% rate would demonstrate that the U.S. Congress is serious about providing certainty for savers and investors and could help stabilize financial markets. Failure to do so this year could send negative signals to investors about the nation’s long-term commitment to lower rates and result in significant downward pressure on an already unstable market.

Globally, an extension would facilitate stronger U.S. savings and investment rates, which are lagging dramatically behind our international competitors. The Federal tax code and regulatory structure has long hindered U.S. economic growth and eroded our international competitiveness. The U.S. taxes new investment more heavily than most of our international competitors. High tax rates on dividends and capital gains raise the cost of capital for new investment and hamper economic growth. Unlike the United States, many countries offset the double taxation of corporate income (income is taxed once at the corporate level and again when distributed in the form of dividends) by providing either a lower tax rate on the dividend income received by a shareholder or by providing a corporation with a credit for the taxes paid on dividends distributed to their shareholders.

U.S. tax rates on long-term individual capital gains were among the highest in the world before rates were reduced in 2003. Increasing the rates from their current levels would put America at a competitive disadvantage relative to our up-and-coming global competitors like China and India.

The 2003 cuts in tax rates on dividends and capital gains were enacted to reduce the double taxation of corporate profits, equalize the taxation of returns on capital investments, and decrease the tax burden on individuals who invest in corporate equities. Academic research on the early impact of the cuts shows that the rate reduction has prompted numerous publicly traded companies to raise or initiate regular dividend payments. A 2004 report from the prestigious National Bureau of Economic Research, which involves the best of American economists in academic research with policy implications, is right on point. It found that, after a continuous decline in dividend payments over more than two decades, total regular dividend payments have increased by nearly 20% since the beginning of 2003, precisely the point at which the lower tax rate was proposed and subsequently applied retroactively. The authors also report that their data “strongly suggest that the 2003 tax reform induced a large, widespread set of firms to initiate regular dividend payments or to raise the payments they were already making.” Further, the report found that this is “unprecedented in the record of publicly traded U.S. corporations.”

Data from Standard & Poor’s show that since the dividend tax cut was signed into law on May 28, 2003, publicly traded corporations making up the S&P 500 alone have increased their dividend payments 626 times through July 29, 2005; in fact, many companies have raised their dividend a number of times over the 25-month period. In dollar terms, dividends by S&P 500 companies have averaged nearly $46 billion per quarter since the reduction in the dividend rate cut was enacted - a 21% increase from the quarterly average of the 10 years preceding the cut.

All Americans who own dividend-paying stock, not just the wealthy, benefit from this dramatic increase in dividend payments. In addition, the cuts in capital gains rates encouraged investors to realize gains. This releases capital for economic growth and greater employment- a vital long-term solution to challenging times today.

If the United States is to meet the challenges of maintaining strong productivity growth, new investment is needed. “Sunsetting” the 15% tax rate on dividends and capital gains at the end of 2008 could have negative impacts on U.S. saving and investment, adversely affect the economy's long-term outlook and reduce the attractiveness of the equity investments that help fuel innovation, economic growth and prosperity.

ACCF in the News

Aspecific company or specific industry is looking at the immediate hit to their interest,” said Mark Bloomfield, President of the American Council for Capital Formation, a Washington group that lobbies for lower taxes on investment income. “What they’re not looking at, and what’s difficult for them to look at, is the perceived overall benefits of a tax plan to the economy as a whole. In the end, though, it is the groups that stand to lose from the proposals that will get more attention,” Bloomfield said. “The people who are going to get candy are less vocal than the people being put in a dentist’s chair,” he added.

-- Bloomberg News, October 20, 2005

ACCF Testifies before Senate Environment and Public Works Committee

Dr. Margo Thorning, Senior Vice President and Chief Economist for the American Council for Capital Formation, told Senate Environment and Public Works members that, by all accounts, Kyoto wasn't working; EU members weren't meeting their emission targets.

“Fifteen members of the EU are projected to be 7% above the 1990 emission levels by 2010. Only Sweden and the UK will meet their targets. Spain, Denmark and Portugal are projected to be 25%-35% above their targets in 2010.” Thorning said the cost of complying with reduction targets was affecting EU gross domestic product.

“Using macroeconomic models to measure Kyoto's effects on the EU shows greater impacts – 0.5%-5% less GDP in 2010 then under a baseline forecast." She added that simulations put job losses in Spain around 800,000 and Italy at 51,000 in 2010. Thorning said emission- trading programs were having an impact on EU electricity prices. “EU prices are rising. It can be attributed to rising global energy prices, but part of the 31% rise can be attributed to higher prices for the right to emit a ton of carbon dioxide.”

-- Platts Coal Trader, October 7, 2005

ACCF Speaks Out on Regulation of In-State Greenhouse Gas Emissions

On September 20, the Bangor Daily News published an op-ed by ACCF Senior Vice President and Chief Economist Margo Thorning on “Greenhouse Gas Controls Bad Business.” The op-ed cites new economic research that shows the adverse economic consequences for Maine’s households, workers and state budget if the state adopts climate policy legislation modeled on a plan called for by the New England Governors/East Canadian Premiers’ agreement. “The people of Maine and the rest of the nation can best contribute to a better world by maintaining a healthy economy. Plans now being considered to regulate greenhouse gas emissions would be a step in the wrong direction because they lessen our ability to offer that help,” Dr. Thorning said.

Click here to read Dr. Thorning’s op-ed “ACCF Speaks Out on
Regulation of In-State Greenhouse Gas Emissions.”

BBC Interviews ACCF President

On the BBC’s “The World Today” on September 15, ACCF President and CEO Mark Bloomfield shared his perspective on the short- and long-term U.S. political and economic fallout from Hurricane Katrina and the war in Iraq on U.S. fiscal policy, in particular the impact of larger deficits on the country’s economic policy agenda. “The World Today,” a program of the BBC World Service, is broadcast in Africa, South Asia and Europe, as well as the U.S, and has about 8 million listeners worldwide. Mr. Bloomfield observed that the U.S. economy should be able to absorb the anticipated new deficit of 3% of GNP with the added spending for Katrina relief in the short term, but over the long term ever-growing deficits coupled with a too-low U.S. saving rate could be a problem. Leadership to address the challenges of Katrina is needed to build both consumer and business confidence and bolster U.S. economic growth.

Kyoto Protocol’s Impact on EU Emissions and Competitiveness

"There are many urgent global problems such as lack of food, sanitation and potable water that are daily imposing hardship and death on the world’s least fortunate citizens. Energy use and economic growth go hand in hand, so helping the developing world improve access to cleaner, more abundant energy should be our focus,” ACCF Senior Vice President and Chief Economist Dr. Margo Thorning advised members of the Senate Committee on Environment and Public Works at the Committee’s hearing on October 5, 2005. “Near-term GHG emission reductions in the developed countries should not take priority over maintaining the strong economic growth necessary to keeping the U.S. one of the key engines for global economic growth. Establishing a mandatory cap and trade system in the U.S. would impede, not promote, U.S. progress in reducing emissions intensity.”

Click here to read the full ACCF statement before
the Senate Committee on Environment and Public Works.

ACCF Senior Vice President and Chief Economist Margo Thorning (right) testifies before the Senate Committee on Environment and Public Works. Seated to the left is Lord Nigel Lawson, British Secretary of State for Energy and later Chancellor of the Exchequer during the 1980s.

ACCF and Marshall Institute Hold Joint Policy Dinner

The American Council for Capital Formation and the George Marshall Institute co-sponsored a policy evening in Washington, D.C. on October 5. Among the guests were Senator Larry E. Craig (R-ID), Lord Nigel Lawson of Blaby, British Secretary of State for Energy and later Chancellor of the Exchequer during the 1980s, and Dr. David Henderson, Visiting Professor at the Westminster Business School and the London School of Economics. Other guests at the session included energy policy experts from government and the private sector.

Lord Nigel Lawson of Blaby (left) and Mark Bloomfield, ACCF president and CEO, open the discussion at the ACCF/Marshall Institute dinner.

ACCF Chief Economist Participates in CEA Roundtable

Dr. Margo Thorning, ACCF Senior Vice President and Chief Economist, participated in a roundtable session on September 13 hosted by Dr. Ben Bernanke, Chairman of President Bush’s Council of Economic Advisers and the President’s nominee to be Chairman of the Federal Reserve Board. Dr. Bernanke invited Dr. Thorning and economists from other think tanks and trade associations to propose topics that should be included in the CEA’s 2006 Economic Report of the President. Dr. Thorning offered several suggestions to enhance U.S. economic performance. First, in light of increased global competition, the Federal tax code should be revised to provide more incentives for saving and investment. Second, we should reduce the cost of capital for energy investments with more rapid capital cost write-offs and other incentives. The U.S. ranks near the bottom of industrialized countries in terms of speed of capital cost recovery. Third, government spending should be reined in so that deficits will decline and reduce the pressure on the Federal Reserve to raise interest rates. Fourth, we should adopt policies to reverse the downward trend in the percentage of U.S. students completing high school and college. New data show that in the last ten years, the U.S. has dropped from first to ninth among industrial countries in terms of the percentage of students who complete high school and college.

CEA Chairman Dr. Ben Bernanke and Dr. Margo Thorning, ACCF Senior Vice President and Chief Economist.

ACCF Hosts 138th Economic Policy Evening

On September 13, the American Council for Capital Formation held its 138th ACCF Economic Policy Evening. The evening’s discussion focused on Recovery from Katrina, U.S. Energy Policy and the Challenges of Globalization: What Can and Should the U.S. Government Do or Not Do? Guests included key economic policymakers from Congress, top journalists, private sector leaders and members of the Maine state legislature.

Click here for more information on ACCF Economic Policy Evenings.

Dr. Margo Thorning, ACCF Senior Vice President and Chief Economist, and Frederick L. Webber, President and CEO, Alliance of Automobile Manufacturers.		Dr. Adrian Wooldridge (bottom left), Washington Bureau Chief, The Economist; Red Cavaney, President and CEO, American Petroleum Institute; James C. May, President and CEO, Air Transport Association;, Jonathan T. Mack, President, Associated Equipment Distributors; and John M. Damgard, President, Futures Industry Association.
Dr. Adrian Wooldridge, Washington Bureau Chief, The Economist.		Mark Bloomfield, ACCF President and CEO, and Representative Adam B. Schiff (D-CA).
Senator Robert Bennett (R-UT), Representative Thomas S. Saviello (I-Maine State House of Representatives), Senator Carol Weston (R-Maine State Senate) and Keith N. Cole, Director, Legislative and Regulatory Affairs, General Motors.		Mr. Damgard, Mr. Mack, and Representative Jim Kolbe (R-AZ).