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Cutting through all the negativism from the naysayers of the anti-Bush, pro-tax Left, Stephen Moore examines why and how the Bush tax cut is already helping the nation's economy.

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Bush Tax Cut Already Working

Cutting through all the negativism from the naysayers of the anti-Bush, pro-tax Left, Stephen Moore examines why and how the Bush tax cut is already helping the nation’s economy.

Finally some overdue good news for workers: Your next paycheck should be higher (if you actually pay taxes) thanks to the recently passed Bush tax cut. The new tax cut officially took effect on July 1. This means that the typical middle-income working family with two or more kids will save more than $1,200 on federal income taxes this year. Unfortunately, the Democrats are already trying to snatch this money away by canceling the tax cut. At least four of the presidential wanna-bes in the Democratic field say they want the tax cut repealed even before workers get a penny of relief. So much for the pro-worker Democratic agenda. These tax-cut critics should pay closer attention to the reaction so far by the financial markets to the tax cut. The stock market has already risen almost 10% since the tax cut passed. This increase in stock values has increased Americans’ wealth by some $825 billion already. The cuts in the capital gains tax and the dividends tax (to a 15% rate for each) has made stock ownership more valuable and shareholders are reaping big monetary gains. So a tax cut of $350 billion has already caused asset values to rise by more than twice that amount. That’s one heck of a return on investment. This stock market rally is exactly what advocates of the President’s tax cut predicted would happen. We argued that the reduction in the income tax rates and the dividend and capital gains taxes would help stimulate the economy almost immediately by reversing the stock market decline and increasing the after-tax value of equities. My own claim, based on the range of estimates from insightful supply-side research by economists such as Lawrence Kudlow, Arthur Laffer, and Brian Wesbury was that the stock market would rise by between 10% and 15% if Bush prevailed in the tax fight on Capitol Hill. Meanwhile, Bush’s opponents not only dismissed the case for an improved stock market, they projected that the Bush tax cut would actually harm the economy by jacking up long-term interest rates. For example, Democratic Sen. Kent Conrad of North Dakota moaned that the Bush economic plan would “raise interest rates, crowd out private-sector investment, and slow long-term economic growth.” A Boston Cream Pie Conrad and other critics have been wrong on all counts. Since passage of the Bush tax cut (through July 12), the Wilshire 5000 index rose from 8,773 to 9,500, an 8% gain. The Nasdaq is up even more (14.6%). Since 52% of Americans own stock, the wealth effect of this market rise has been broadly distributed to most income groups. Now it is undeniably true that hundreds of factors affect the stock market other than taxes. And the stock market could easily capsize again next week. But so far at least, the stock market as a whole seems to like the tax cut as much as investor class voters do. Here is what is even more impressive. Interest rates have not risen this year; they have fallen in response to the tax cut. In fact, just a few weeks ago, Freddie Mac announced that the mortgage interest rate slid to below 5% for the first time since before Elvis Presley died. The average home mortgage rate has fallen by some 20 basis points since Bush announced his tax cut earlier this year. The tax cut probably didn’t cause the interest rates to fall, but these numbers are the equivalent of a Boston cream pie in the face of the Bush tax cut skeptics who predicted soaring interest rates that would burden homeowners and small businesses. It is worth noting here that in the 1980s the anti-Reagan skeptics also said that tax cuts would cause higher inflation and higher interest rates and both fell by half during his presidency. They were wrong then and they’re wrong now. So what is the total payoff so far from the tax cut? When we combine the value of low interest rates for American homeowners who refinance (and the benefit to the federal government that its debt can now be carried at a lower interest rate penalty), to the increase in stock valuations, we have a tax cut that so far has generated at least a $1 trillion improvement in the nation’s balance sheet. That’s a super-sized payoff for a tax cut that only just now has hit American paychecks. George W. Bush is developing one of Ronald Reagan’s most endearing qualities: both on foreign and domestic policy, he is time and again proving his staunchest and most self-righteous critics on the left dead wrong. No wonder they don’t like him or his policies.

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Mr. Moore is HUMAN EVENTS' economics correspondent and an economist at the Cato Institute.

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