The act implements several basic but revolutionary tax changes.

The most distinctive aspect of the Jobs and Growth Tax Relief Reconciliation Act of 2003, (the "Act") is its remarkable brevity. The final law-a scant eight pages-is perhaps the shortest piece of major tax legislation in modern U.S. history. (By comparison, the Tax Reform Act of 1986, another landmark tax law, was supposed to promote "tax simplification," but instead offered up a mind-numbing 1,200 pages of alleged "simplifications.")

They say that good things come in small packages, and the Act gets a lot done in few words: This is a substantial cut in federal income taxes, and will have a major impact on how people invest and work in coming years.

The Act contains an estimated $330 billion in tax reductions, and in the process implements several basic but revolutionary tax changes that are extremely good for business in general, and for capital investors in particular. First, the maximum federal personal income tax bracket is cut to 35% from the current 38.6%, and the lower brackets are each trimmed by two to three percentage points, retroactive to January 1, 2003. (These 2003 changes effectively accelerate the scheduled tax reductions previously enacted by the 2001 Tax Act, except that the tax cuts now take effect immediately rather than over a fairly lengthy period of years.)

The biggest changes introduced by the Act are a reduction in the long-term capital gains rate from 20% to 15%, and a cut in the dividends tax rate from the current ordinary rate of up to 38.6% to a rate equal to the long-term capital gain rate of 15%. In effect, the tax on dividends is cut to just 15% from almost 40%-an amazing sea change in the taxation of C corporations and their shareholders.

The Act also contains a variety of broadly popular tax incentives and benefits, including a temporary increase in the child tax credit to $1,000 from $600 for many taxpayers, relief for married taxpayers from the so-called "marriage penalty," some alternative minimum tax relief, a temporary increase in the Code section 179 deduction (allowing companies to deduct capital investments up to $100,000 instead of depreciating them over a period of years), and an increase and the extension of the "bonus depreciation rules" basically allowing a 50% bonus depreciation for certain property placed in service after May 5, 2003, and before January 1, 2005.

What does it all mean? Well, the clearest unequivocal winners under the Act are people who invest in the stock of domestic C corporations-particularly investors who own publicly traded stocks that pay significant dividends.

For years, the Internal Revenue Code has been overtly hostile to C corporations, subjecting corporations to a brutal "double tax," the first taxing corporate income and the second taxing dividends. Private companies, as a result, are almost always "pass-through" entities (S corporations and LLCs). Virtually the only U.S. businesses that today operate as C corporations are publicly traded companies (required by law to be C corporations) and venture finance-backed companies not eligible for S status (i.e., companies hoping to go public). From this perspective, double taxation was really just an awkward "proxy" tax on our capital markets; tellingly, almost no other major country imposes double taxation on corporations.

Thanks to the double tax, C corporations had an incentive to issue debt rather than equity (this was a "back door" form of pass-through taxation, since the corporation could deduct interest payments and thus corporate profits were effectively taxed one time, as interest income, to lenders). Corporations also regularly bought back their own shares instead of paying dividends, because this created capital gain and helped stock prices. Meanwhile, real estate investment trusts (REITs) got a boost because they are another form of pass-through entity.

The new Act does not eliminate double taxation, but it reduces it by taxing dividend income at capital gains tax rates, and reducing the capital gains rate to 15%.

How should investors take advantage of this tax law change? To begin with, the Act creates greater incentives to invest in equity and obtain capital gains treatment and/or dividend treatment. However this change is only relative, and in fact double taxation, while reduced, continues to distort the U.S. capital markets.

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