Don Luskin Nukes the “Repeal the Tax Cuts for Hurricance Victims” Argument

When he’s not running poorandstupid.com blog (which is neither), Don Luskin writes a mean (that is, “very good”) column for Smart Money.

His latest refutes the idea that money to pay for Katrina and expected Rita relief can come from repealing the tax cuts of 2003 (bolds are mine):

The S&P 500 today is more than 25% higher than it was when the tax cut on dividends and capital gains was enacted in May 2003.

And the same logic applies to income tax rates, which were also cut in 2003. When people get to keep more of the money they earn, they work more and they work harder. The result is the same: more productivity, innovation, employment and economic growth.

Want proof? Gross domestic product, after inflation, has risen 8.4% in the eight quarters since the tax cuts were enacted (in an economy with a Democrat president, this would be known as an “economic boom”–Ed.)

Now let me guess what some of you are thinking. What good does it do for stock prices to rise and economic growth to accelerate if government goes broke for lack of tax revenues? After all, if you cut taxes doesn’t that mean the government will collect less?

If that’s what’s worrying you, then consider a few numbers. According to Treasury Department statistics, the federal government collected tax revenues of $1.79 trillion in the 12 months leading up to the enactment of the 2003 tax cuts. In the next 12 months, despite lower tax rates, the government took in more: $1.82 trillion. Then in the next 12 months — still with lower tax rates — it took in even more, at $2.06 trillion (that’s a 13.2% increase in one year–Ed.).

Pretty simple, right? If the tax cuts are repealed, revenue growth will fall back for all of the reasons Luskin describes in the full piece. So repeal will create no new money for relief–NONE.

It’s completely logical and based on real-world experience. Logic not being their forte, some Republican congressmen who should know better don’t get it:

But some Republicans are questioning the extension of the tax cuts, too. They are concerned that the cost of federal disaster relief demands higher taxes to pay for it. For some reason they just don’t believe the evidence staring them right in the face — that faster economic growth means tax revenues expand even though tax rates are lower. They imagine that they can raise more revenues with higher taxes that will surely slow the economy. It’s like thinking you can get a cow to give more milk by beating it.

If today’s low tax rates on dividends and capital gains aren’t extended, they will still continue on for two more years. But the slowing effects will be felt immediately, because people make investment decisions based on their expectations for returns many years in the future. And the stock market will act accordingly — it will go down. Not in two years, but now.

Leave the tax cuts alone. In fact, the “cuts” have been in place for over 2 years, so I say turn the language around: No revenue-REDUCING tax increases that will take money AWAY from hurricane relief. Besides, Tom Delay notwithstanding, there’s plenty of pork to eliminate.