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Conference Committee to Extend Cap Gains and Dividend Tax Cuts to 2010

We are hearing from our sources on Capitol Hill that the House/Senate Conference Committee has reached a compromise that will extend the 15% maximum tax rates on long-term capital gains and qualified dividends through 2010. Currently, the lower rates are set to expire on December 31, 2008.

Sources tell us that this compromise should be made public tomorrow, and will include a two-year extension of the 15% maximum tax rates (through 2010), a one-year Alternative Minimum Tax hold harmless provision (through 2007), and incentives for small business investment.

Recent gains in US equity prices have likely been driven to some extent on the increasing likelihood of just such a compromise. An extension of the 2003 tax cuts should give them another boost. However, the real benefits will unfold through the end of the decade. When the tax cuts first became law in May 2003, business investment accelerated significantly. Low tax rates on investment encourage more entrepreneurial activity, which is an unqualified positive for the economy as a whole. We assess the likelihood of an extension at 80%.

(Brian Wesbury is the Chief Economist for First Trust Advisors in Chicago, IL)