Crapo: A Tax Burden We Cannot Bear

On March 11, I reintroduced legislation to permanently extend the 15 percent tax rate (0 percent on those in the two lowest income tax brackets) on capital gains and dividends that was enacted as part of tax relief in 2003. I’ve introduced this legislation every Congress since 2005. This bill has even greater urgency now considering the President’s budget proposal before Congress that will allow the tax rates on these investment earnings to rise to 20 percent for individual filers earning above $200,000, and couple filers earning over $250,000.

First, to echo concerns of many about this budget: we shouldn’t be raising taxes during a recession. Although these rates wouldn’t take effect until 2011, announcing a rate increase on capital gains and dividends today that will go into effect in less than two years will certainly create hesitation on the part of investors. What occurs in two or five years matters when considering long term investments. Investors are already keeping their money on the sidelines; it seems counterintuitive, not to mention poor tax policy, to discourage investment for the future. In a challenging economy, lower-priced assets can be a wise purchase. These purchases work to turn the economy around. Allowing the lower 15 percent rate to expire in 2011 will further inhibit much-needed investment in markets today and in capital that will put our economy on the road to better health.

In general, taxes on capital gains and dividends represent double taxation—these dollars have already incurred income taxes; taxing them again when they return as gains on investments serves as a disincentive for people to invest in the first place. Broadly, these taxes discourage investment in U.S. markets—investors can turn to Germany, Hong Kong or Singapore, for example, where there are no taxes on capital gains.

And, lest we think that taxes on capital gains and dividends affect only the very wealthy, the fact is that small businesses constitute a considerable portion of taxpayers in the income categories that my bill covers. Most small businesses aren’t required to pay the corporate income tax. Thirty-five percent of all business taxes are reported on personal income tax forms through sole proprietorships, S-Corporations and partnerships. Incidentally, this is also why top individual income tax rates matter to small businesses—a large share of small business “flow-through” income ends up being reported at these higher rates. With 60 to 80 percent of net new jobs created by small businesses, and the fact that small businesses employ over half of the labor force and generate over half of our Gross Domestic Product, it stands to reason that if these businesses see increased taxes in their future, they will make the logical business decision to downsize or cease operations altogether. If, at the very least, they can count on the tax code remaining steady as it currently stands, they can more confidently make investment decisions for the future.

Holding tax rates to historically-low levels rather than increasing them to 20 percent (with no guarantee that this would be the only increase), encourages business growth by allowing businesses to keep more of their own money. Returning money through government programs distorts market choices, plain and simple.

In the midst of tax season, it’s sobering to note a Tax Foundation statistic that, in 2008, Americans will spend more on taxes than they will on food, clothing and housing combined. We need to do what we can to reject any increased tax burden, and work hard to decrease the existing burden. As a member of the Senate Budget and Finance Committees, I will continue to fight for these priorities.