Tax Cuts For The Wealthy Will Balance The Budget

Obviously, I don't think that the Bush tax cuts are only for the wealthiest Americans. However, if you insist that they are, you have to consider that tax receipts have been growing since they went into effect. In addition, non-withheld tax receipts (or taxes paid on capital gains and not on wages) are at an all time high. That means, that more people are investing their money and then paying capital gains tax on it. Since the capital gains rates have been reduced to 15% (due to the Bush tax cuts), people have more incentive to invest their money, which causes companies to grow, which means more taxable income, which means more tax receipts. So, cut tax rates, collect more money. Seems counterintuitve and since we don't emphasize financial acumen for our youth, most people in the U.S. won't understand it, which is why Democrats will try to roll back the cuts if they win in 2008.

It's best summed up in this exchange between Larry Kudlow, Art Laffer (of Laffer Curve fame), and Liz MacDonald (HT: TheCorner):

KUDLOW: Here's another one for the record books. Get this: US tax nonwithheld receipts from individuals hit a record one day $48.7 billion increase on April 24th. The prior record was a year ago at $36.4 billion. This reflects, almost always, capital gains tax receipts from the bullish market at the record low 15 percent marginal tax rate on investment. Did someone say Laffer curve?

This is big stuff. It's been playing at the top of the Drudge Report all day. $48.7 billion dollars for the April 24th tax date. That is the largest in history, Arthur, the largest in history. It's almost all from cap gains, nonwithheld.

I did a little math, Art. Since the Bush tax cuts of mid-'03, the fiscal years '04, '05, '06 and we're almost halfway through '07, nonwithheld tax receipts up $144 billion, or 59 percent. Now, Art, I know you take a lot of flak in government accounting circles. They say lower tax rates lose revenues. This says lower tax rates increase revenues. Could you comment for us? Could you teach us something here?

LAFFER: Well, I just love these numbers, Larry. And, frankly, the one area where you can really expect to see this type of response is in capital gains, in the nonwithheld areas. I mean, the size of this one day receipt is so much larger than the next largest day's receipt, it's amazing. If you look all around this country, I don't see how people can think that you really should let these tax cuts expire. We're almost in balanced budget right now. It's coming very close. Just let this thing keep going. Don't stop it. I don't know why these people want to stop it, Larry.

KUDLOW: Liz, I just want to ask you. Last night we ran a segment, Goldilocks and the three bears. Goldilocks being the Bush tax cuts, the three bears potentially being Hillary, Obama and Edwards, who want to reverse the tax cuts. What's your thought? What Arthur is saying about the cap gains revenue yield, does that link to this bull market in stocks?

LIZ MacDONALD: Absolutely, and I think the world of Art Laffer. I privately call him Saint Art Laffer. Because God bless him, because he's really shown the way here. And here's the deal: the capital gains tax is a voluntary tax. In other words, people will sit on it and not pay it if the tax rates are high. When they go low, they will unlock those assets, right? And this is the best noninflationary liquidity that you can bring into the market. So yes, I am worried about the Democratic Congress coming in and removing these very powerful forces that are driving the stock market forward.