Wednesday, June 9, 2010

Shoals ahead?

I'm not a big fan of Art Laffer but his piece in the WSJ
recently is worth your time:

On or about Jan. 1, 2011, federal, state and local tax rates are scheduled to rise quite sharply. President George W. Bush's tax cuts expire on that date, meaning that the highest federal personal income tax rate will go 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero. Lots and lots of other changes will also occur as a result of the sunset provision in the Bush tax cuts.

Tax rates have been and will be raised on income earned from off-shore investments. Payroll taxes are already scheduled to rise in 2013 and the Alternative Minimum Tax (AMT) will be digging deeper and deeper into middle-income taxpayers. And there's always the celebrated tax increase on Cadillac health care plans. State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere.

Now, if people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be.

Also, the prospect of rising prices, higher interest rates and more regulations next year will further entice demand and supply to be shifted from 2011 into 2010. In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has. When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe "double dip" recession.

I wouldn't go as far as claiming that we will experience a "double dip" recession, but overall, I agree with Mr. Laffer---tough economic times lie ahead.


Don E. Chute said...

Mr. Laffer-- Has been more right, than wrong, over his career.

It's amazing, throughout history, when taxes go down, federal revenues increase.

November is important, the majority in Congress needs to be reversed. Then a bill can be passed, not only to keep the cuts in place, but maybe to lower them further.


VH said...

Don, you're right, Mr. Laffer has been more right than wrong. And I like the Laffer Curve, I think that it is a very good and reliable theory.

I hope he's wrong about the "double dip" recession. We certainly don't need more economic pain.

I think we have one more fork in the road before heading off a long term economic cliff. If in November, Republicans or fiscally-minded politicians don't win big--it is OVER.