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This piece originally appeared on National Review Online on Oct. 18, 2006.
In 2004, two out of three voters were investors, the majority of which voted to re-elect President George W. Bush. In fact, investors increased their vote for Bush from 51-46 in 2000 to 53-46 in 2004. As a result, Bush received 5 million more votes in the last election than the first time around, and eclipsed national levels for all categories of investors, including self-identified members of the investor class, 401(k) owners, and direct stockowners.
Today, however, even with the stock market at an all-time high, generic support for Republicans running for Congress has fallen. Why? Because the GOP has failed to explain how their pro-investor tax cuts produced the stock market boom. Additionally, Republicans have yet to put forth a compelling policy agenda that speaks to the desire of American shareholders to build savings and wealth for themselves and their families.
The largest demographic shift in this country over the past 25 years is the number of Americans who own stocks directly. When Ronald Reagan entered the White House, only 17 percent of Americans were direct stockowners. Today more than 50 percent of households, and two out of every three voters, owns shares of stock. Investors, regardless of income, wealth, gender, or race, more often vote Republican than non-investors. This rapid rise of middle-class investors has made shareholders the most powerful voting bloc in the country.
In 2002 and early 2003, the economy and the financial markets were still recovering from the lingering effects of the dot.com bubble, the 9/11 terrorist attacks, the Clinton-Gore recession, and the corporate scandals. President Bush and the Republican Congress took direct action to stimulate the economy and boost investor confidence by trimming the capital-gains tax to 15 percent and cutting in half the double taxation of dividend income paid to investors by corporations.
By increasing after-tax rewards for saving and investing, the 2003 tax-rate cuts worked precisely as advertised. Since May 2003, the U.S. economy has expanded by a quarterly average of 3.7 percent (annualized) and has added 6.6 million new jobs. As of the close of the markets on Monday this week, a total of $5.7 trillion in new shareholder wealth has been created since the tax-cut agreement was reached on May 20, 2003. Total dividend and share repurchases increased an astonishing 123 percent to over $600 billion for the 12-month period ended in June. Total household net worth is up $14.4 trillion, or 37 percent, since the tax cut.
Instead of touting this amazing record of success to America’s investor class, Republicans have been virtually silent about the economy this campaign season. A cursory review of campaign press releases since September generated by Senate GOP incumbents in tight races found no specific mention of the economic and stock market payoffs related to the cap-gains and dividend tax-rate cuts of 2003. Granted, the war in Iraq, the Mark Foley page scandal, and other issues are front and center these days. But the fact of the matter is that the GOP is not speaking to the aspirations of the middle-class investor voter.
However, it is not too late. As if this writing, the Dow is poised to break 12,000. This will create a huge opportunity for the GOP to connect their tax-cutting policies and the resulting increase in shareholder wealth. (NRO’s Jonah Goldberg suggests that Bush “figure out how to show up by surprise at the New York Stock Exchange some day soon when it goes into record territory (again) and clang the bell.”) At the same time, since elections are about the future, Republicans should offer a “Contract with America’s Investors,” listing specific actions they would take to boost the stock market even more if the American electorate allows them to retain control of the Congress.
On this last point, we would recommend the following:
Make the Bush tax cuts permanent. The lower tax rates on capital gains and dividends and the repeal of the death tax are scheduled to expire within the next four years. Taxes on dividends and capital gains will increase on January 1, 2011, while federal death taxes will come back to life in 2011 after being zeroed out in 2010. The stock market’s continued rise will depend on making these investor tax cuts permanent.
Index capital-gains tax rates to inflation. Since 1913, the U.S. Treasury Department has ignored the effects of inflation when calculating capital-gains taxes. As a result, the effective tax rate on real gains is about twice the current rate of nominal gains, according to estimates by the Congressional Budget Office. The failure to index capital-gains taxes to inflation has historically punished individual investors by reducing their real returns. Under current policy, shareholders are being taxed on inflation-adjusted losses as gains, an obvious discouragement to long-term investing. At the same time current policy inhibits long-term economic growth by making long-term capital investment less certain and far more risky. Reps. Mike Pence (R., Ind.) and Eric Cantor (R., Va.) have introduced a bill to end this unfair inflation tax.
Eliminate the capital-gains tax on mutual fund reinvestments. Currently mutual fund shareholders must pay a capital-gains tax when distributions are reinvested in their existing funds. These shareholders typically are long-term investors, but current law requires them to pay capital-gains taxes on redistributions, even though they have not sold their fund shares. Capital-gains taxes eat away 50 percent of a lifetime return on mutual funds. This is an unnecessary layer of taxation that bites into compounded returns and reduces lifetime savings for shareholders. Rep. Paul Ryan (R., Wisc.) has offered legislation that will at least allow investors to defer these taxes until they realize their gains.
Enact Lifetime and Retirement Savings Accounts. Lifetime Savings Accounts (LSAs) and Retirement Savings Accounts (RSAs) allow everyone to save up to $5,000 per account, tax-free, with no limitations based on age or income status. Enactment of this policy will eliminate capital gains, dividend, and interest taxation for nearly every American shareholder, thus increasing after-tax return and boosting shareholder wealth significantly. (These accounts also will eliminate 1,100 pages from the tax code since they would replace the current hodgepodge of savings accounts.) LSAs and RSAs will not only boost savings for working families, but will increase the after-tax return on investment and jumpstart equity values.
Investor voters should ask congressional candidates a simple question: Are you for increasing the savings of working middle-class families or not? These proposals will do just that, while also lowering the barriers to capital formation. Embracing this agenda is a political winner.
Cesar Conda was Vice President Dick Cheney’s chief domestic and economic policy advisor from 2001 to 2003, and is a senior fellow at FreedomWorks and a principal of Navigators, a Washington, D.C.-based public-affairs firm. Daniel Clifton is executive director of the American Shareholders Association.