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Laffer Curve Redux

The Wall Street Journal story “Tax Receipts For Capital Gains Were Strong in ’04” once again illustrates the validity of the Laffer Curve. And, early projections indicate the trend continued last year in ‘05.

At the new 15 percent reduced tax rate, taxpayers realized $479 billion in cap-gains in ‘04 compared with the $381 billion predicted by the Congressional Budget Office. Hence, government cap-gains receipts came in at $60 billion, compared with the $48 billion estimate. In 2005, the CBO preliminary guess is $75 billion in receipts, a big 25% increase over ’04.

As Art Laffer has taught us all, if you tax something less, you get more of it. This includes capital and labor. But the purest form of the Laffer Curve involves investment taxes, where economic behavior is incredibly responsive to changing tax rates. The new CBO report bears this out.

My guess is when the “official scorekeepers” get around to the dividend tax cut; that one will also pay for itself.

As Congress debates final passage of the investor tax cuts, legislators are nuts to assume static revenue loss when all the evidence shows a revenue gain.

But the good news is all indications are that the investor tax cuts will, in fact, be extended two more years in the budget reconciliation bill. This is undoubtedly a key reason why stocks have gotten off to their strongest first two months of the year since 1998, according to this morning’s WSJ.

- Larry Kudlow, Host of CNBC's Kudlow & Co.