What is ahead in the Economy pt. 1
Jun 30th, 2010 by David Anderson
Famed Economist Arthur Laffer shares his concerns with the rest of us.
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.
What will be the response? People will try to minimize their losses and hope that a new regime will make changes in 2013. The result he believes will be more activity this year and less next year.
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.
I believe the economy is at risk of a double dip. We have not had a recovery by any traditional measures. We have just ended the recession and muddled along. That is why foreclosures are still high, and employment is stagnant. There are many reasons for this fact. I am not a supply sider (though I do agree with them as far as they go) so I look at more than the taxation picture. I am not personally married to the Bush tax cuts, they were too complicated and a band-aid when we needed fundamental reform, but most should be extended while we work on a permanent solution. Still the taxation part of the equation is compelling and should be part of our voting calculus. I hope to examine other aspects of our economic difficulties such as energy, regulation, and debt in coming posts.
Europe is finally abandoning Keynesian economics- but, not our Socialist-Democrats. Projected 2020 debt/GDP? 80%!