The Tax Disadvantage Of Ordinary Income: An Event Study On The Legislative Process Of JGTRRA

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Mingjun Zhou


Jobs Growth and Tax Relief Reconciliation Act, JGTRRA 2003, Treasury Yield Reactions


The Jobs Growth and Tax ReliefReconciliation Act of 2003 (JGTRRA), signed into law by President George W.Bush, was a significant legislation in recent tax history.  As the tax rates on capital gains anddividends are reduced to a historical low of 15%, U.S. stock prices haveincreased and the cost of equity capital declined after its passage.  In contrast to the dividends and capital gainsthat receive preferential tax rates under JGTRRA, yields from U.S. Treasurybill remain tax-disadvantaged as ordinary income at a top marginal rate of 35%. Using an event study approach based ontwo years of Treasury yield observations, the author examines Treasury yield reactionsto major legislative events surrounding the passage of JGTRRA.  The result suggests that a tax policyintentionally favoring dividends and capital gains over ordinary income may unintentionallypush up yields in the Treasury bill market, thereby affecting the cost ofgovernment borrowing.


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