Tax Hikes and the 2011 Economic Collapse

[Guest]

By ARTHUR LAFFER

People can change the volume, the location and the composition of their income, and they can do so in response to changes in government policies.

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.

http://online.wsj.com/article/SB10001424...latestheadlines

[karl]

"This isn't rocket surgery."

Laffer has always been a no-bull economist who distills it down so that even a liberal could understand it, if he wanted to.

[phkrause]

"This isn't rocket surgery."

Laffer has always been a no-bull economist who distills it down so that even a liberal could understand it, if he wanted to.

Unfortunately you'll have to explain it to me a little clearer, I don't seem to understand it at all. :)

[karl]

Taxes are deleterious to the econmy. Raising taxes increases these deleterious effects on the economy.

I know this seems like anathema to liberals, because how else will they obtain other people's money to squander? But there it is.

[Guest]

It's a fact.

[phkrause]

Taxes are deleterious to the econmy. Raising taxes increases these deleterious effects on the economy.

I know this seems like anathema to liberals, because how else will they obtain other people's money to squander? But there it is.

I guess you didn't figure it out, but I was being sarcastic. I just get really [censored] off when I continue to hear this or that about liberals, its all BS. But I guess I could say that's all that conservative's do, talk about liberals. It reminds me about the Boston Red Sox and Yankee fans. The Yankee Fans could care less about the Red Sox, but the Red Sox fans are so obscessed (sp) with the Yankees that they allow that to be the only thing that's on there mind. There hate of the Yankees is the only thing that controls them. That's what I'm seeing here. Absolutely incredible.

[Guest]

The only hatred, or venom on this thread, is coming from you pk. What Arthur Laffer wrote, and what karl said about it is all true, and was not said with animosity. It is not BS like you say. And you don't have to be filled with hatred to see that. But I guess it does help if you understand a little something about basic economics.

When people don't understand something, I guess it's easy just to get mad and call it BS, instead of putting forth the effort it would take to try and grasp it.

I guess you think higher taxes are a good thing.

[olger]

Laffer correct.

Karl correct.

Richard amazing.

PK uneasy.

Jesus returning.

og out

[doug yowell]

The only hatred, or venom on this thread, is coming from you pk. .

Not quite, Richard. I hate both the Yankees and the Red Sox!!

[olger]

[phkrause]

The only hatred, or venom on this thread, is coming from you pk. What Arthur Laffer wrote, and what karl said about it is all true, and was not said with animosity. It is not BS like you say. And you don't have to be filled with hatred to see that. But I guess it does help if you understand a little something about basic economics.

When people don't understand something, I guess it's easy just to get mad and call it BS, instead of putting forth the effort it would take to try and grasp it.

I guess you think higher taxes are a good thing.

I have never brought forth venom or hatred on this forum period. I have never told anyone to think my way or else. I never use the word "conservative" to beat over anyone's head. Every other word here seems to be "liberals have no idea of anything" its as if its a crime to be a democrat or a liberal. Like I've said on many occasions there is no difference of either party. At face value they show us that they are not the same, but behind closed doors they laugh at all of us.

[rudywoofs (Pam)]

States without an income tax:

Alaska

New Hampshire

Tennessee

Florida

South Dakota

Washington

Nevada

Texas

Wyoming

States which are currently bankrupt:

(amount shown is in billions) Source: http://www.globalresearch.ca/PrintArticle.php?articleId=19292

California $6,900

Michigan 3,900

New York 3,200

Pennsylvania 3,000

Ohio 2,300

Illinois 2,200

North Carolina 2,100

Indiana 1,700

New Jersey 1,700

Florida 1,600 - no income tax

Wisconsin 1,400

Texas 1,000 - no income tax

South Carolina 886

Kentucky 795

Missouri 722

Connecticut 498

Minnesota 477

Georgia 416

Nevada 397 - no income tax

Massachusetts 387

Virginia 346

Arkansas 330

Alabama 283

Colorado 253

R.I. 225

Idaho 202

Maryland 133

Kansas 88

Vermont 33

South Dakota 24 - no income tax

Tennessee 21 - no income tax

Virgin Islands 13

Delaware 12

So 5 out of the 9 states with no income tax are bankrupt.

Yet the article states:

Quote:

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.

Interesting.

[karl]

States without an income tax:

Alaska

New Hampshire

Tennessee

Florida

South Dakota

Washington

Nevada

Texas

Wyoming

States which are currently bankrupt:

(amount shown is in billions) Source: http://www.globalresearch.ca/PrintArticle.php?articleId=19292

California $6,900

Michigan 3,900

New York 3,200

Pennsylvania 3,000

Ohio 2,300

Illinois 2,200

North Carolina 2,100

Indiana 1,700

New Jersey 1,700

Florida 1,600 - no income tax

Wisconsin 1,400

Texas 1,000 - no income tax

South Carolina 886

Kentucky 795

Missouri 722

Connecticut 498

Minnesota 477

Georgia 416

Nevada 397 - no income tax

Massachusetts 387

Virginia 346

Arkansas 330

Alabama 283

Colorado 253

R.I. 225

Idaho 202

Maryland 133

Kansas 88

Vermont 33

South Dakota 24 - no income tax

Tennessee 21 - no income tax

Virgin Islands 13

Delaware 12

So 5 out of the 9 states with no income tax are bankrupt.

Yet the article states:

Quote:

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.

Interesting.

I'll see if I can find some better data regarding this. It doesn't seem possible all these states can be in debt for that many trillions of dollars (a thousand billion is a trillion) but maybe they are.

Also, Laffer did not say the states without income taxes were in the black, he just said they are growing - attracting business - because they are financially a better investment for a company.

[karl]

OK, for information on state debt you can go here: http://www.forbes.com/2010/01/20/states-debt-pensions-interactive-map.html Click on your state.

This lists the per capita debt of California as $1800. That is less than 60 billion, rather than over 6 trillion (which was the amount listed in Rudywoof's post.) And that seems more in line with what we've been watching over the years. I'm not in favor of 60 billion, mind you. I'm opposed to ALL deficit spending. I'm a conservative. We believe in responsibility.

Nevada and Texas, which have no income tax, have some of the lowest per capita debt in the nation. But they are still not in the black.