John Kerry's 19 Year Attack on Investors
By Daniel Clifton Published 10/29/2004
Tech Central Station
Next week's election is important for middle-class investors. A number of public policy issues hang in the balance that will influence shareholder returns. But uncovering John Kerry's intentions on public policy issues is difficult because he speaks in broad generalities which give us very little evidence of his real intention. Moreover, he continues to claim he was for an issue at one time in his life and now he is against it.
Both of these patterns are extremely prevalent in analyzing what Kerry has proposed to do on investor related issues. As a result, the American Shareholders Association (ASA) has undertaken a study of his 19-year Senate record believing that the best way to determine what his goals as President will be is to look at where he has been. We found that Kerry has spent the past 19 years in the Senate attacking investors and his votes have had a detrimental impact on investors.
The result of Kerry's voting record is quite surprising. For all his years in the Senate he appeared to talk about a pro-growth agenda, yet when the record was examined he essentially opposed investors on nearly every vote offered in the Senate in his tenure.
Capital Gains Tax Reduction
Despite claiming that he has voted to reduce the capital gains tax, the ASA analysis could not find one example of Kerry voting to reduce the capital gains tax. He voted to increase the capital gains tax by 40 percent in 1986 and voted against capital gains tax reduction at least 15 times since 1989. These votes were important to shareholders: the largest drag on shareholder returns is from the capital gains tax and the tax itself reduces the after tax return on equities.
To demonstrate the impact the capital gains tax has on the individual investor (and the consequences of Kerry's votes), we compare Roth Individual IRAs which are exempt from capital gains taxes with a taxable account. In this example, the double tax on capital gains reduces the lifetime return on investment by 56 percent.
An individual at 29 years of age with $40,000 of income making a $3,000 contribution per year to a Roth IRA will retire with more than $772,000 of income. Under a taxable account, however, the return is dramatically reduced to less than $343,000, and thus, the hypothetical investor lost 56 percent of his/her investment compared to the Roth IRA. Any reduction in capital gains tax offsets the enormous impact the tax places on a lifetime return for investors and Kerry sided against investors each and every time.
But capital gains taxes are more than just lowering the returns to shareholders. Capital gains tax reductions increase stock prices by altering the risk adjusted, after-tax return on equities. Kerry had 15 opportunities to vote for increasing stock prices since 1989 but he voted against shareholders every single time including the very successful 1997 and 2003 reductions. In both times, more than $2 trillion of new shareholder wealth was created in the first 180 days following their passage. Conversely, Kerry voted to increase the capital gains tax by 40 percent in 1986 as part of the Tax Reform Act of 1986 which reduced shareholder wealth by $200 billion upon passage.
Double Taxation of Dividends
In one of the most appalling examples of a politician "saying one thing and doing another" Sen. Kerry turned his back on investors concerning the double taxation of dividends. On December 3, 2002, Kerry delivered a speech to the City Club of Cleveland in which he proclaimed "we should attempt to end the double taxation of dividends."
President Bush followed one month later with a proposal to abolish the double tax and Kerry, in a stunning reversal, quickly denounced the proposal as a give away to the rich and voted against the legislation.
Even without Kerry's support the double tax was reduced by as much as 62 percent and just as important, the new rate of 15 percent was equalized with the capital gains tax rate. The result of the dividend tax cut has been positive: Dividend issuance has reversed its 25 year decline and more companies are increasing dividend payments to its shareholders.
Individual Retirement Accounts
One factor driving the unprecedented growth of investors has been the expansion of Individual Retirement Accounts (IRAs). Despite widespread knowledge of the benefits these investment vehicles provide, Kerry voted to significantly restrict IRAs in 1986 and has voted at least 10 times against IRA expansion.
The double tax on investment income reduces the after tax return on investment for investors. As such, policymakers seeking to increase private retirement savings created IRAs, which allowed savings to accumulate without the double tax. Initially, IRAs were extremely limited, but in 1981 participation was expanded as part of the Reagan tax cuts and the program took off. From 1980 to 1986, annual contributions to IRAs rose nearly ten-fold, from $4 billion to $38 billion.
Yet, Sen. Kerry voted to restrict IRA contributions as part of the Tax Reform Act of 1986, which imposed severe consequences on IRA accounts. According to the Treasury Department, the level of annual IRA contributions fell sharply and never recovered from $38 billion in 1986 to $15 billion in 1987 and $8.4 billion in 1995. Participation also declined from 15.5 million IRA participants in 1986 to just 4 million by 1997.
While families making over $40,000 were forced to stop participating, savings also dropped among families retaining full eligibility. In fact, participation declined by 40 percent between 1986 and 1987 for families still eligible for the program, despite the fact that the change in law did not affect them.
The decision to restrict IRAs had a significant, negative impact. But Kerry has been given at least 10 chances to correct his mistake since then and he has failed every time. He voted against IRA expansion twice in 1989 and twice in 1997 as well as once in 1992, 1993, 1995, 1998, and 2001. He also abstained from the final 2001 tax cut which successfully allowed investors to increase their contributions in a year to $5,000.
Even on the most popular investor issues, such as IRAs, Kerry has a consistent opposition to ensuring middle-income investors can maximize their returns. His vote to restrict IRAs and his 10 votes against expansion indicates he may not even want this program in place if he is elected President.
Other Important Investor Issues
Free trade and the opening of markets appeared to be the one issue Kerry was aligned with investors on as a Senator. Over the course of the campaign, however, he has increasingly abandoned his long held belief in the benefits of free and open markets to consumers, shareholders, and workers.
Kerry voted in favor of the North American Free Trade Agreement and Permanent Normal Trade Relations with China. He voted at least 10 times to grant sitting Presidents Fast Track Authority to negotiate trade agreements. But to line up labor union support, he has repeatedly denounced the agreements, has promised to review existing trade agreements in his first 100 days of office.
Tort reform is another key issue facing investors because company liabilities affect profits and the value of shareholder wealth. Kerry's pick of John Edwards as the vice presidential nominee should give investors pause: passage of badly needed class action and asbestos reform will not be completed if Kerry is elected president.
Overall, Kerry has been an enemy of the shareholder during his 19 year Senate tenure. His election next week would be troubling for American shareholders.
Daniel Clifton is executive director of American Shareholders Association. He can be reached at email@example.com