Jeff Denham: It's jobs, savings, economy

September 10, 2010 

I don't need to tell anyone here in the Valley about how hard the economic recession has hit our area.

All signs indicate that our recovery will be slow and likely a double-dip recession, despite the rosy predictions coming out of Washington, D.C.

One thing Congress can do to really help is to make current tax rates on capital gains and dividends permanent. That would stabilize the economy, help protect jobs and give seniors, farmers, veterans and families access to their money on which they depend.

If Congress does nothing, tax rates on dividends could jump by as much as a shocking 164 percent.

Here's the situation.

The current maximum tax rate for long-term capital gains and dividends is 15 percent. This relatively low rate encourages Americans to invest for the long term.

For example, more than 27 million Americans directly own stock in companies that pay dividends, and millions more own these stocks through mutual funds, IRAs, pensions, life-insurance policies and 401Ks.

These tens of millions of taxpayers are invested in the very economy that we are trying to stimulate.

The result, should Congress fail to act to make these rates permanent, would be an enormous tax hike that would most certainly put the brakes on any economic recovery.

And without the tax benefits that come with the distribution of dividends, companies would have little incentive to pay that money out to their shareholders. It would eat into the income upon which millions of Americans depend.

Seniors would be among those who would pay a heavy price. Many retired persons rely on the dividends paid by their investments for their daily expenses.

They already may have lost ground on their investments, and their homes may be worth significantly less than they expected. Increasing taxes on their dividends and capital investments would be another severe economic blow.

Two other groups that would suffer from Congress' inaction are farmers and small business owners.

Imagine a farm or small business organized as a C corporation, for example, with $400,000 of retained earnings.

If the owner distributed the income under the current tax rates, the federal tax bill would be $60,000. But if Congress does nothing, that bill would be $158,000 in 2011 under the maximum rate, and a whopping $174,000 in 2013.

Some people might suggest that higher tax rates on dividends and capital gains taxes should apply for the very wealthy. The problem is that studies show that companies lower their dividend payments when taxes on them go up -- even if only for a small portion of shareholders.

Another study, by Barclay's Capital, shows that stock prices would fall as much as 8 percent if the current tax rates expire.

These outcomes would exact a high price on middle-income taxpayers. Smaller dividend payouts and lower stock prices would hurt most of those who are living on a pension payment or who have invested in mutual funds, IRAs or 401Ks. Our entire economy would suffer.

It's obvious that Congress needs to take action now.

We are hopeful that all of the Valley's elected officials, including Sens. Barbara Boxer and Dianne Feinstein and Reps. Jerry McNerney, Dennis Cardoza and Jim Costa, do the right thing.

Vote to boost our economy, protect our jobs and keep our savings safe. Make these tax rates permanent.

State Sen. Jeff Denham of the 12th District is running for congress as a Republican.

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