Larry Kudlow

Most supply-siders believe that if the Democrats manage to take the House and Senate two-and-a-half weeks from now, President Bush’s investor tax cuts will be safe. First, the tax cuts already have been extended to 2010. Second, the president will surely veto any tax-hike legislation that a new Democratic Congress might pass. (Think Grover Cleveland, the greatest presidential veto-er in American history.)

Maybe so, but the political story will be more complicated, especially if a Democratic Congress passes new “pay-as-you-go” rules. This could put the tax cuts in jeopardy as early as next year.

There are essentially two kinds of pay-go. One is a spending limitation that was used by the Gingrich Congress to balance the budget in the 1990s. This would be good. The other is a revenue pay-go, which is not so good. In this scenario, if the Democrats cobbled together a big-bang deficit-reduction package, large tax hikes would be put in place to meet the new deficit targets. Since Congress scores the investor tax cuts on dividends and capital gains as static revenue losses -- even though the evidence shows they pay for themselves -- these tax cuts would be subject to repeal or rollback.

Should revenue pay-go materialize, President Bush might be confronted with a Hobbesian choice of vetoing a so-called $500 billion deficit-reduction package that would increase the cap-gain, dividend, and top-income-bracket tax rates.

Truth be told, the Democratic party desperately wants to return the income-tax rate to President Clinton’s 39.6 percent. It’s an obsession that’s lodged in the Democratic DNA, a class-warfare mentality that seeks to penalize the rich and soak American success. In practice, it would be a Soviet-style income-leveling exercise in the name of making the non-rich feel better.

And it’s nonsense.

President George W. Bush’s tax cuts have done an amazing job of reigniting the U.S. economy. The 2003 tax cuts rallied the stock market, generated 6.5 million new jobs, and produced soaring revenues that have, in turn, slashed the deficit.

But all this is in peril if the new pay-go rules go through.

So let me warn my conservative friends and fellow members of the American investor class: A Democratic sweep come November 7 will put Bush’s hugely successful tax cuts on the chopping block.

It’s a sobering thought, particularly in light of sinking Republican fortunes.

On Tradesports, the online betting parlor, the House GOP 2006 contract has dropped to a new low of 32 percent. In late September, prior to the Mark Foley scandal, it had been 57 percent. Bettors, it seems, are giving up on the contract.

Larry Kudlow

Lawrence Kudlow is host of CNBC’s “The Kudlow Report,” which airs nightly from 7 p.m. to 8 p.m.