Lot Is Riding On Lower Tax On Investment
Investor's Business Daily
March 17, 2006
By Bill Archer
Passed in 2003, the dividend tax rate reduction
expires at the end of 2008. Unless Congress moves to extend
it, we may all miss out on a benefit that puts more money
in our bank accounts, allows companies to grow and creates
First, the lower rate has been good for investors. The Treasury
Department estimates that 24 million investors saved an average
of $947 on their taxes last year. And for the 7 million seniors
who own dividendpaying stocks, the average savings exceeded
Keep in mind that the typical electric utility shareholder
is over the age of 65, has been a shareholder for more than
10 years, and relies on dividend payments to supplement income.
Extending the 15% rate means these shareholders would be able
to keep more of their earnings in their pockets.
Also, studies show that stock ownership is rising quickly
across all income brackets, and especially among low-income
households. According to the American Shareholders Association,
there was a 91% increase in the number of "lower 20%
households" owning stock between 1995 and 2001.
Many of these new investors joined the market as "indirect
shareholders," meaning they participate through IRAs
or 401(k) plans. However, just as those who own stock directly,
these indirect owners benefit from higher equity prices, increased
dividend flow and the improved corporate governance that results
from the lower rates.
What if you don't own stock at all? The lower rates help
you as well. Since the 2003 law was passed lowering taxes
on dividends, the economy has grown at a swift clip and created
more than 4 million jobs in a broad range of employment sectors
in the process.
That brings us to another important point: Companies rely
on people like you to attract the capital needed to grow.
Take the electric utility industry. Over the next few years,
electric power companies across the nation will infuse massive
amounts of cash into critical infrastructure projects to meet
this country's growing demand for energy. This includes building
the power plants and transmission infrastructure needed to
ensure that Americans continue to enjoy access to reliable,
affordable electricity, as well as installing new, updated
pollution controls to comply with current and future environmental
The reduced tax rate is crucial to the industry's ability
to attract the necessary capital to finance these critical
projects. The investment community prefers that companies
sell rather than borrow to raise funds, and a lower tax rate
encourages corporations to do just that.
Should the reduced tax rate on dividends be allowed to expire,
tax policy would again favor debt over equity in order to
raise capital, an outcome that could make Wall Street leery
of providing financing for major new projects.
Moreover, the lower tax rates on dividends and capital gains
have effectively reduced the cost of capital for businesses
to invest in new equipment, facilities and products by as
much as 15.5%, according to Treasury Department estimates.
Of equal if not more importance, customers and employees
also benefit from the measure. Data show that the lower tax
rate prompts investors to buy utility stocks, which translates
to an increase in funds needed by the utilities themselves
to bolster training programs, infrastructure upgrades - in
short, service. That's a bottom-line benefit for everyone.
With so much riding on the (bottom) line, it's difficult
to imagine not extending or making permanent the lower dividend
tax rate. It makes sense for America.
Archer represented the Houston area in Congress from 1971
to 2001 and was chairman of the tax-writing House Ways and
Means Committee from 1995 to 2001. He is now senior policy
adviser at PricewaterhouseCoopers LLP.