Press Center

 Remarks of Deputy Assistant Secretary for Financial Institutions Policy Greg Zerzan Before the Vineland, NJ

Thank you very much for inviting me to speak to you today.  It is a great privilege to be able to leave Washington and come before a group dedicated to providing jobs and economic growth in our communities. 

It is interesting to me to think back to last year at this time. All of us were shocked by the accounts of corporate wrongdoing which swept through our capital markets, the revelations of misdeeds throughout the summer that ultimately led Congress to pass the Sarbanes-Oxley Act. This legislation made sweeping reforms in our securities laws which are designed to ensure that fairness and transparency remain the norm in America�s capital markets.

But throughout last summer, as Congress investigated the wrongdoing at Enron, WorldCom, Global Crossing and a handful of other large companies, the most striking thing was the story that wasn�t reported in the media.  That is the story of the great success that is the American enterprise system.  The reason Enron and the others made such news was because they represented such an aberration. 

In a system like ours, which rewards competition and separates market winners and losers based solely on their ability to get the job done, it truly was newsworthy that anyone would think they could get away with trying to fool the market.  As you in this room know as well as anyone, at the end of the day the bottom line is hard to hide.  Market forces are relentless in separating businesses into winners and losers.

It is this principle that drives the President�s plan to promote jobs and growth in our economy.  The President�s plan rests on one very central idea:  our money belongs to us, and not the government.  The American people have proven they do a better job deciding how to spend and save than government ever could.  That is why the President�s plan to put money back in the hands of the taxpayers is so essential to our economic success.

Consider the President�s plan to eliminate the double taxation of corporate dividends.  Under the current system, investors are punished for their investment success. If you take a dollar out of your savings account to buy a share of stock, you are becoming an owner of that company. If your company earns a profit, your company is taxed.  If your company then returns that profit to you in the form of a dividend, you are then taxed again on that same profit.   What do companies do to avoid this double taxation?  They avoid paying you a dividend.  In the current system, it makes more sense for a company to increase its borrowing and run a deficit then it does for the company to pay dividends.  By having debt on its books, the company gets a tax deduction.  Therefore companies take on more loans and retain their earnings, rather than pass the profits on to the shareholders that own the company.

This perverse disincentive to pay dividends has severe real world consequences.  It makes debt more attractive, thus increasing the risk of bankruptcy in hard times.  It encourages the diversion of corporate funds to non-optimal economic allocation.  It makes it more likely that a company will attempt to use accounting methods that obscure its books in order to avoid paying dividends.  And it makes relocating overseas more attractive, where companies can take advantage of foreign tax laws that don�t penalize dividends.  Currently the United States is one of only three countries in the developed world that treats dividends as fully taxable.

Eliminating the double taxation of dividends has several clear advantages.  Most importantly, it immediately provides economic stimulus by putting money directly in the hands of investors.  This money can be reinvested, used to pay off debt, or spent in the economy, in any case creating new jobs and further stimulating growth.  And rather than being a one-time shot, the dividend tax cut has long-term effects:  it continues to return money to the economy for as long as companies are succeeding, thus cycling money back into the economy and producing a wealth generating effect.

Secondly, reducing the double taxation makes companies more accountable to the market.  There is no better way to judge how your investments are doing than by looking at what they are doing for your bank account.  The President likes to say �earnings are an opinion, cash is fact.�  By encouraging companies to pay out profits in the form of dividends, shareholders will get the best method yet devised to figure out how well their investments are doing.

The President�s jobs and growth plan also calls for accelerating tax cuts that are currently scheduled to take effect over the next seven years.  As the President has said, if tax cuts are going to do us good in the future, they will certainly do us good now.  Under the President�s plan single filers, married couples, families with children and small businesses will all benefit from the creation of a more fair tax system.

The President�s jobs and growth plan will provide very real benefits here in New Jersey.  With the President�s plan:

� More than 2.9 million taxpayers in New Jersey will have lower income tax bills this year.

� 790,000 business taxpayers can use their tax savings to invest in new equipment, hire additional workers, and increase pay.

� 2.25 million married couples and single filers will benefit from accelerating to 2003 the planed expansion of the 10-percent bracket currently scheduled for 2008.

� More than 1.16 million taxpayers in New Jersey will benefit from accelerating to 2003 the reductions in income tax rates in excess of 15-percent currently scheduled for 2004 and 2006.

� More than 1.12 million married couples in New Jersey will benefit from eliminating the marriage tax penalty by increasing the standard deduction for joint filers to double the amount for single filers, and increase the width of the 15-percent bracket to twice the width for single filers.  These two provisions are currently scheduled to phase in between 2005 and 2009.

� More than 755,000 married couples and single parents in New Jersey will benefit from increasing the child tax credit from $600 to $1,000 now.  This increase is currently scheduled to phase in between 2005 and 2010.

� More than 1.17 million  taxpayers in New Jersey will benefit from eliminating the double taxation of dividends.

The President�s plan will provide tax relief to 92 million Americans.  A family of four with an income of $40,000 a year would receive a 96% reduction in federal income taxes.  Instead of paying $1,178 a year, that family would pay $45.  For small businesses, the tax relief is equally impressive.  Under the jobs and growth plan 23 million small business owners will see their taxes reduced.  The plan would triple the amount that a business can deduct for equipment purchases, to $75,000 in a single year, and would index the business equipment deduction to inflation.

Some people say that now is not the right time for tax cuts.  These are not new arguments. In fact, they have been made every time a tax cut has been proposed.  They made these arguments in 1962, when President Kennedy proposed across the board tax cuts even as America fought the Cold War and raced to put a man on the moon.  They made these arguments in 1982, when President Reagan proposed tax cuts even as he increased defense spending in order to bring about the collapse of the Berlin Wall. These arguments were on the wrong side of history then, and they�re on the wrong side of history now.  In both cases, the results of tax cuts were dramatic:  lower taxes led to higher growth and more jobs. 

The President�s plan to create jobs and growth is the right stimulus needed to ensure America�s economic success both now and in the future.  For some people it is never the right time to cut taxes; they will always favor more government spending over more money in taxpayers� hands.  But we cannot control the growth of government spending by giving government more money; we cannot keep the deficit under control by allowing a blank check to be drawn on the taxpayers� account.  By putting money back into the hands of those that earned it, we ensure both greater fiscal responsibility on the part of the government, and greater growth in our economy.

Let me conclude by saying it is almost impossible to give a speech at this time in our history without thinking for a moment about who we are as a people, and where we stand in the world.  Our heroes in Afghanistan and Iraq and around the world have been putting their lives on the line to protect the American way.  Their successes have been awesome, and it is important to understand why.  It is not simply because our military is the best trained, best equipped, best armed fighting force the world has ever seen, although that plays a large part.  It is because at the end of the day, when asked to plunge into a dark cave or go house to house against people that want to kill them, it is the individual soldier, not his equipment, that will allow him to get the job done. 

Our soldiers come from a society that values individual initiative, encourages risk taking, and rewards success.  These values are not new to us; they came to us from our parents and grandparents and great-grandparents, and it is these same values that draw people to our shores everyday.  And it these values that make our soldiers advance while our enemies retreat; it is these values, brought to the battlefield by our brave men and women in uniform, that allow them to defeat enemies that wish to impose a very different way of life upon the world.

And as I don�t need to tell the people in this room, it is these same values that provide the backbone of our free enterprise system.  Hard work, individual initiative, risk taking, and the promise that you will get to keep what you earn are what drive our businessmen and women everyday.  The President�s plan embraces these values by returning money to the people that earn it.  It is the right plan to create jobs and growth, and it promises results for both the short term as well as into the future. 

Thank you very much for allowing me to speak with you today, and I look forward to answering any questions you may have.


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