NCPA - National Center for Policy Analysis

Good Tax Ideas From Waco

August 21, 2002

Soon after President Bush's economic conference in Waco, he told reporters that he was looking closely at some fairly major tax initiatives.

The first involves increasing the amount of losses investors can deduct on their tax returns.

  • At present, the IRS takes a percentage of all gains, but only shares in losses up to $3,000 per year -- a figure fixed since 1978.
  • Given the magnitude of recent stock market losses, increasing the loss limit would greatly benefit many middle class taxpayers.
  • Next, reduce the double taxation of corporate profits, perhaps by allowing dividends to be received tax-free, which would, according to a new report by economist Ed Yardeni of Prudential Securities, encourage firms to pay out more dividends.
  • This makes sense because dividends are a better indicator of profitability than easily-manipulated earnings statements.

In short, it would solve a lot of the corporate governance problems we read about almost daily.

Bush is also considering liberalizing 401(k) contribution limits in order to allow people to make up for losses in their retirement accounts. Since contributions to such accounts are tax deductible and earnings compound tax-free, losses in 401(k) accounts are never deductible. It seems only fair to allow people an opportunity to undo the damage caused by the stock market by being able to save more for their retirement.

Cutting the capital gains tax rate would help draw new investors into the stock market and perhaps spark a rally. It would be even more effective if combined with indexing of capital assets to inflation, as the personal exemption already is.

These are good ideas that Congress should be encouraged to act upon quickly, so that investors can benefit from them this tax year. Bush should send a formal proposal to Congress the day it reconvenes.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, August 21, 2002.

 

Browse more articles on Tax and Spending Issues