The key finding in AF&PA's recently-released Capacity Survey was a disturbing trend that should alarm all of us in the paper industry. U.S. paper and paperboard capacity fell in 2001 and 2002 for the first time in consecutive years.
There are several reasons for this, not the least of which are oppressive taxes on industry, increased foreign competition and cyclically weak paper and paperboard demand.
There is hope, however, in the Bush Administration's economic growth plan, with its proposal for the elimination of double taxation of dividends. This is arguably the most important step in capital formation tax policy in generations. As such it deserves the full support of the U.S. forest products industry.
The survey showed declines of paper and paperboard capacity of 1.9 percent in 2001 and 1.3 percent in 2002. For the three-year period 2000 to 2002, capacity to produce paper and paperboard declined at an average annual rate of 0.6 percent after growing at an average rate of 2.2 percent a year during the decade of the 1990's.
Excluding tissue, which faces less competition from overseas producers due to the cost of shipping this high bulk product, capacity to produce paper and paperboard declined at an average annual rate of 1.0 percent in the past three years. Further declines are projected for paper and paperboard capacity in 2003.
Meanwhile, 40 mills and 104 machines were permanently closed in the 2001-2002 period. That only continued a trend that goes back to 1997. Since then, 91 pulp and paper mills have been closed, with a loss of 43,500 jobs.
Current law taxes dividends twice, once at the corporate level and again at the individual level. The United States is one of the few major industrialized nations to tax these earnings two times, and there is really no logical policy reason to tax any income stream twice. Elimination is a bold change that is long overdue.
Double taxation results in U.S. firms relying more on borrowing as opposed to equity financing, thereby increasing the cost of capital. Eliminating this double tax will fuel a lasting economic recovery by increasing investment in the stock market, lowering corporate borrowing in favor of raising capital by equity offerings, and increasing consumer dividend income.
Not only will it raise the value of millions of Americans' retirement portfolios, increased investment in the stock market will power a resurgence of investments in and by U.S. industry.
The elimination of double taxation also will allow U.S. companies to be more competitive in the global marketplace. A 2001 study by PricewaterhouseCoopers showed that the U.S. forest products industry has the highest individual income tax rate on dividend income compared to our major competitor nations.
According to the study, which looked at effective tax rates in Indonesia, Brazil, Finland, Japan, Germany, Canada and the United States, the U.S. tax rate for paper manufacturing was 62 percent, just below Canada's 64 percent, and 18 percentage points higher than the average of the other five countries. The effective tax rate on corporate timber operations in the United States was the highest of all nations studied, 55 percent, and 25 percent higher than the average of the other competing countries. The biggest reason was the double taxation of dividends.
Therefore, the most important thing we can do to make our industry competitive on taxes is to end the unfair and unwise double taxation of corporate income.
This is about jobs, about mills being closed here and built overseas, about the fundamentals of being competitive. If we pay more in taxes than our competitors—and we do—we are not competitive. This has to change, and for the first time in decades we now have a chance to do so.
I urge members of the forest products industry to support the President's plan and contact your members of Congress to make elimination of dividend taxation a critical order of business this year. Do it now! I don't know when we will have another chance.
