Friday, June 11, 2010

Tax Hikes and the 2011 Economic Collapse


This from ARTHUR LAFFER at the Wall Street Journal:

...It shouldn't surprise anyone that the nine states without an income tax are growing far faster and attracting more people than are the nine states with the highest income tax rates. People and businesses change the location of income based on incentives.

Likewise, who is gobsmacked when they are told that the two wealthiest Americans—Bill Gates and Warren Buffett—hold the bulk of their wealth in the nontaxed form of unrealized capital gains? The composition of wealth also responds to incentives. And it's also simple enough for most people to understand that if the government taxes people who work and pays people not to work, fewer people will work. Incentives matter.

People can also change the timing of when they earn and receive their income in response to government policies. According to a 2004 U.S. Treasury report, "high income taxpayers accelerated the receipt of wages and year-end bonuses from 1993 to 1992—over $15 billion—in order to avoid the effects of the anticipated increase in the top rate from 31% to 39.6%. At the end of 1993, taxpayers shifted wages and bonuses yet again to avoid the increase in Medicare taxes that went into effect beginning 1994."

Just remember what happened to auto sales when the cash for clunkers program ended. Or how about new housing sales when the $8,000 tax credit ended? It isn't rocket surgery, as the Ivy League professor said.

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.

In 1981, Ronald Reagan—with bipartisan support—began the first phase in a series of tax cuts passed under the Economic Recovery Tax Act (ERTA), whereby the bulk of the tax cuts didn't take effect until Jan. 1, 1983. Reagan's delayed tax cuts were the mirror image of President Barack Obama's delayed tax rate increases. For 1981 and 1982 people deferred so much economic activity that real GDP was basically flat (i.e., no growth), and the unemployment rate rose to well over 10%.

But at the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984. It has always amazed me how tax cuts don't work until they take effect. Mr. Obama's experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011.

Consider corporate profits as a share of GDP. Today, corporate profits as a share of GDP are way too high given the state of the U.S. economy. These high profits reflect the shift in income into 2010 from 2011. These profits will tumble in 2011, preceded most likely by the stock market.

In 2010, without any prepayment penalties, people can cash in their Individual Retirement Accounts (IRAs), Keough deferred income accounts and 401(k) deferred income accounts. After paying their taxes, these deferred income accounts can be rolled into Roth IRAs that provide after-tax income to their owners into the future. Given what's going to happen to tax rates, this conversion seems like a no-brainer.

The result will be a crash in tax receipts once the surge is past. If you thought deficits and unemployment have been bad lately, you ain't seen nothing yet.

The tsunami is coming.

What all this federal tax and spend/bailout legislation has accomplished is growing the welfare nanny state. America grows more in debt and more investment capital will just be sent overseas along with hope of any real growth in the private sector .

Government only gets money it spends from the taxpayers - or by printing more of it. The taxpayers would have done something with their money if wasn't taxed away from them. They might consume or they might invest or they might just accumulate their wealth for future use. Therefore every dollar spent by the government is a dollar not spent by private citizens, or by businesses. Of course if the government prints more money - we just end up with massive inflation. Government doesn't really produce anything and it certainly is not controlled by natural market forces. By redistributing wealth they just create people dependent on government programs. We need to downsize government.

One commenter on Laffer's article had this to say:
It would be easier to sleep at night if I believed the regime WAS actually clueless. I now think the truth is much, MUCH worse. That their ultimate goal is to destroy the private sector and seize its wealth, ensuring the majority of the population is absolutely dependent upon the feds' 'largesse'.

How else do you explain the endless mandates, regulations, taxes and 'incentives' which are all about controlling behavior and rewarding voting blocks? The near one-half of this country who pay no federal taxes do NOT 'deserve' to take more from those who do.

I read "Atlas Shrugged' again for perspective, and the similiarities are absolutely frightening. Ayn Rand saw the future, and it IS ours, and it IS terrifying.

Nothing less than a wholesale dispatch of tthe LOOTERS in Congress who are responsible will bring ANY hope of avoiding the same dystopia Rand foresaw. (And yes, that includes MANY Republicans!)

Truly, I don't believe we have much time to stop the total and absolute destruction of our way of life.

Yes, this has been brought to us by people on both sides of the aisle - not only in Washington, but in some of our own state legislatures. We are spending far more than we can afford. We are in enormous debt, and our elected officials seem to think that we can borrow and spend our way into "prosperity". They also think that the average person can pony up for every tax increase they can throw at them. They couldn't be more wrong! The breaking point is being reached. More government spending and higher taxes are hurting this country and its citizens at every level of government.

"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance."

- CICERO - 55 BC
I guess we haven't learned much since 55 BC.