Arthur Laffer, whose famous “Laffer Curve” demonstrated the relationship between tax rates and economic activity, is warning that, if we think 2009 and 2010 have been bad economic years, we better buckle up, because 2011 is going to be worse.
The reason? The expiration of the Bush tax cuts, coupled with tax increases passed during the Obama administration. Arthur Laffer explains in the Wall Street Journal.
“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.”
Just as the Reagan tax cuts in 1981 caused 25 years of economic expansion, interrupted by two mild recessions, the Obama tax increases are bound to cause a double dip recession, perhaps a Second Great Depression, starting in 2011. Economic activity will slow, tax receipts will plummet, and deficits, already unimaginably large, will explode.
Part of the reason for this is that people are shifting as much income and economic activity as possible to the current year, which will be more favorable taxably than next year. Better to take the lower tax rates on income this year than the higher ones next year.
Arthur Laffer paints a bleak picture of an economic recovery choked off by unwise government policies that featured high taxes and profligate spending. There is, however, one forlorn hope.
If, as expected, the GOP retakes the Congress this year, it can busy itself restoring the Bush tax cuts, repealing the Obama tax cuts, and perhaps even enacting some tax cuts of its own while restraining spending. The question arises, what will President Obama do during the last two years of his administration?
Will, realizing that his agenda is in ruins, choose to go along with a free market oriented Congress? Or will he choose to dig in his heels, veto tax and spending cuts, and possibly drag down the United States with him?
Thus, President Obama may have the power to save the United States – or to destroy it.
Tax Hikes and the 2011 Economic Collapse, Arthur Laffer, Wall Street Journal, June 7th, 2010