NCPA - National Center for Policy Analysis


January 29, 2007

Democratic Senator James Webb of Virginia played the class card in his State of the Union response Tuesday night, but he is apparently too new to the job to realize how crucial "the rich" are to his party's spending ambitions, says the Wall Street Journal.

Data released last week from the Congressional Budget Office (CBO) confirm that the tax cuts of 2003 keep soaking the rich, especially on their capital gains:

  • CBO and Congress's Joint Tax Committee originally estimated that reducing the capital gains rate to 15 percent from 20 percent would cost the Treasury $5.4 billion from 2003-2006.
  • Actual revenues exceeded expectations by 68 percent, creating a $133 billion revenue bonanza for the feds.
  • CBO's original forecast for 2006 was for $57 billion in capital gains revenues, but actual receipts were $110 billion.

This surprise windfall is one reason the budget deficit is also far lower than CBO predicted, says the Journal.

The lower capital gains tax has raised stock values by raising the after-tax return on capital investment.  It has also given stock owners a greater incentive to sell their shares, and then reinvest the proceeds, because the tax penalty on these transactions is lower, says the Journal.

The 2003 rate cut liberated hundreds of billions of dollars of capital for new investment.

By the way, the National Venture Capital Association reports that venture capitalists invested $25.5 billion in 2006, the biggest burst of dealmaking since the stock market bubble burst in 2000.  This is seed money for new companies and new jobs that will lift future tax revenues, says the Journal.

Source: Editorial, "Soaking the Rich, Again," Wall Street Journal, January 29, 2007.

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