The capital gains tax should not be reduced to give more money to the government. Instead, the tax should be abolished since it is a punitive form of double-taxation on income that is invested. Nonetheless, it is worth noting that the government is collecting more money at a lower tax rate. Because there are many factors that influence economic performance, this does not necessarily mean that the lower rate is “paying for itself,” but it certainly indicates that there is a supply-side effect. As the Wall Street Journal explains, the bean-counters at the Joint Committee on Taxation failed to predict this result:
Data released last week from the Congressional Budget Office 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% from 20% would cost the Treasury $5.4 billion from 2003-2006. Whoops. Actual revenues exceeded expectations by 68%, 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. 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. …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.