A Tax Cut Big Spenders Can Agree With!

In response to the rapidly cooling U.S. economy, it remains to be seen whether the Bush economic stimulus plan will prove itself an effective remedy. One thing, however, is certain: the $150 billion plan is expensive. The best way to offset the cost of the plan, and to kick start the sagging U.S. economy, would be to immediately cut the tax rate on capital gains.

Most lovers of government spending can’t understand how any tax rate cut could ever net the government more revenue. But the fact is that when you reduce the tax rate on capital investment, capital investment surges. This, in turn, enables people to produce and earn so much more that a government will take in higher revenues even while it taxes its people at the lower rate.

Think of a farmer. You can’t help him plant more corn by adding hours to his day. But enable him to upgrade his capital equipment from a hand hoe to a tractor, and he can increase the corn he plants in a day a thousand-fold. It’s capital investment that jet powers economic growth, and reducing capital gains taxes that jet powers capital investment.

Just theory, you say? Consider this. In 1997, Congress dropped the capital gains rate from 28% to 20%. Before the cut, the Joint Committee on Taxation had predicted the Treasury would bring in $195 billion in capital gains revenues over the next two years. But because of tax cut-spurred economic growth, the actual capital gains revenues during those two years came in at $279 billion — $84 billion more than expected. More recently, in 2002, the Treasury’s capital gains revenue came in at $45 billion. Then, after a 2003 cut in the capital gains rate from 20% to 15%, the resultant tax cut-spurred, accelerated economic growth caused capital gains revenues by 2005 to soar to $97 billion – a more than 100% gain. Many economists believe that the capital gains tax rate that would maximize government revenues is zero. They make a strong case that the reduction in revenues from capital gains would more than be made up by the income, sales, and payroll tax gains of the resultant super-charged economy. Others think that what is zero is the probability that we can totally eliminate taxation of capital gains. In the current political climate, they may be right, but I’ll keep my fingers crossed.

You see, with its spending going through the roof, and its absolutely huge credit card bills to pay, Congress may be forced to cut or totally eliminate the tax on capital gains – not because it wants to leave you with more of what you earned, but simply because it needs the money.

~ by Matthias on September 1, 2008.