LITTLE ROCK — Confidence in the strength and resilience of our nation’s economy has allowed the United States to maintain the world’s leading economy for decades. In difficult economic times, investors both at home and abroad know that the United States is always the best bet. We have the infrastructure, resources, work force and ingenuity that allow us to weather economic downturns and return to prosperity.
Today, while we possess the basic economic fundamentals that have made us great, we lack the certainty that makes American businesses some of the world’s strongest and most successful.
Right now, investors, business owners and employers are facing looming tax increases that have the potential to drastically alter how they make decisions. Unless Congress takes action, on January 1 the tax rates on dividends will rise from the current maximum of 15 percent to 39.6 percent, while the tax rates on capital gains will rise from15 percent to 20 percent.
If these new, elevated tax rates are allowed to take effect, businesses of all sizes, both in Arkansas and across the country, will be negatively affected-from my company, Delta Trust, all the way up to global, mega-retailer Wal-Mart. Like many businesses, to ensure certainty of taxation, Delta Trust, too, accelerated our dividend payment for our shareholders into 2012.
The worst tax policy that one can have is the one we face today-a temporary one based on poor, congressionally crafted deals, centered on expiring provisions that damage long-term planning and investment return certainty.
The great irony in this dividend saga is that following the 1986 Tax Reform Act, the removal of the double taxation of dividends was a policy favorite of many Democratic and Republican members of both houses of Congress. Their policy goal was greater neutrality between corporate finance structures using debt and equity.
Then-Senate Finance Chairman and future Treasury Secretary Lloyd Bentsen, D-Texas, spoke for many in his party when he said: “Our tax system seems to favor corporate debt over equity,” as corporate debt interest is deductible and dividends payments are not. Members worked for years to end this bias in favor of debt financing and they succeeded in 2003 when President George W. Bush signed the Jobs and Growth Tax Relief Reconciliation Act.
Of course, now it is popular for many elected officials to demonize the very policy for which they worked so hard 20 years ago. If Congress follows President Barack Obama’s lead, these new tax rates would immediately raise the cost of equity capital in the United States and once again “unlevel” the playing field between debt and equity for corporations.
Following this tax “incentive,” companies may well decrease their dividend payout ratios, return to larger debt burdens or seek another form of corporate organization, or even country of incorporation. This is problematic because investment in capital- and dividend-paying companies grows the U.S. economy, creates jobs and puts money into the pockets of shareholders and workers.
Unfortunately, the false notion that only the wealthy invest in dividend-paying companies or the stock market generally and stand to benefit from the current tax rates has taken hold. This couldn’t be further from the truth. People of all walks of life own dividend-paying stocks, and it is likely that anyone who possesses a 401(k) plan or pension plan is an indirect owner of at least some dividend paying stocks. Our retirees and seniors are the most likely to own dividend-paying stocks, as many of them rely on the steady, dependable cash payments to supplement their retirement incomes.
Therefore, this is not an issue that only concerns the wealthy. The majority of Americans-whether they know it or not-have a stake in the game. And, unless the current dividend and capital gains tax rates are extended, that stake in the game is going to be materially diminished come January 1st.
Uncertainty is a prime contributor preventing our economy from getting back on track. If businesses and investors knew that the current tax cuts would be extended permanently, they could begin making forward-looking decisions. We have less than a month before the new higher tax rates are set to take effect.
It is critical that our leaders come to a bipartisan agreement that will allow the current favorable tax rates on capital formation to be made permanent. This is a common-sense measure supported by policymakers in both political parties. Let’s keep our economy headed for faster growth and higher incomes for all Americans.
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J. French Hill is the CEO and chairman of the board for Delta Trust & Banking Corp. He was a senior economic policy official during the administration of President George H.W. Bush.
Editorial, Pages 18 on 12/21/2012