Lower Cost of Capital Spurs New Investment

WASHINGTON – In 2003 President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA). The legislation cut income tax rates, reduced the capital gains tax rate by 25 percent and substantially reduced the double tax placed on dividends. Immediately following the tax cut, economic growth, job creation, stock prices, dividends, and personal income skyrocketed. The 2003 tax cut has been an unmitigated success and should be extended.

Cutting capital gains and dividend taxes lowered the cost of capital for firms, which leads to more investment and jobs. Immediately following the tax cut, investment soared, factories became backed up with new orders, and new employees were hired to increase production. The Department of Treasury quantified the cost of capital reduction by measuring the share of an investment’s economic income needed to cover taxes over the course of its lifetime (called METR). The table below demonstrates the METR in the corporate sector was reduced by 15.5 percent and in the economy overall by 17.4 percent after the tax cut was implemented. This sharp reduction led to more investment and capital accumulation, and ultimately resulted in greater economic growth.

Congress needs to extend the lower tax rates on dividends and capital gains.

Tax Cut Reduced the Cost of Capital, Which Led to New Investment & Job Creation