Monday, January 30, 2006

Tax cuts

The report published by the Congressional Budget Office last week indicates that the 2003 capital gains tax cuts have already more than paid for themselves.

In 2003, before the capital gains tax cut bill was passed, the CBO Budget and Economic Outlook report projected capital gains tax revenue at $60 billion in 2004 and $65 billion in 2005, for a total of $125 billion.

The capital gains tax was passed by Congress in 2003, and took affect in 2004.

Opponents to the tax cut claimed that it would reduce tax revenues by $27 billion in 2004 and 2005, resulting in $98 billion in revenue instead of $125 billion. They were wrong. Not just a bit wrong, but completely, 180 degrees wrong.

Tax revenues did not decrease as a result of the tax cut. They increased. The actual capital gains taxes collected were $71 billion in 2004 and $80 billion in 2005, for a total of $151 billion.

Instead of reducing revenue by $27 billion, the revenue exceeded projections by $26 billion.

Chalk up one more for supply-side economics.

Daniel Clifton of the American Shareholders Association predicted this result, saying
A capital gains tax cut spurs the growth of new businesses, increases the wage of workers, enhances consumer purchasing power, and grows the economy at large, resulting in more overall gains to be taxed. When capital is taxed at a lower rate, any revenue losses are offset because there is more overall capital being produced, and thus more total revenue being generated.
The reverse is true, as demonstrated by President Clinton. In 1993 he signed the largest tax increase in history, raising the top rate by 16 percent. However, tax revenues over the next four years only beat pre-hike estimates by one percent.

So what put the budget into "surplus" at the end of the 1990's? It was a combination of Republican-led reigning in of spending, and a 1997 capital gains tax cut engineered by a Republican Congress. In spite of cutting the capital gains tax rate by 28%, capital gains tax revenues exceeded projections by 11% over the next three years.

Now I reject any argument which claims that we should be trying to maximize tax revenues. The government already spends too much money and is too intrusive. Balancing the budget can not be accomplished by increasing the tax burden. When we face a budget deficit, the problem is excessive spending, not insufficient taxation. We can not blame Bush's tax cuts for the current budget deficit. The numbers simply do not support the claim that tax rate cuts result in deficits.

Instead, we must blame Congress for their inability to control spending. Republicans won control of Congress on this platform in 1994, and for a while, they remained true to the principle of fiscal restraint. But in the five years that Republicans have controlled Congress and the White House, they have failed miserably to keep spending under control. In 2005 the Federal government spent $2,472.2 billion, up from $1,789.2 billion in 2000. This represents a 6.68% annual increase in spending, outpacing inflation, population growth, and GDP.

There are two key elements to a successful implementation of fiscally conservative economic policy: low taxes and controlled spending. One does not work without the other. We are doing fine on taxes, but its time to get spending in check.

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