Arthur Laffer Says We Are Headed For A Double Dip Recession

[Perchoutofwater]

Tax Hikes and the 2011 Economic Collapse

Today's corporate profits reflect an income shift into 2010. These profits will tumble next year, preceded most likely by the stock market.

 

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.

 

John Fund of WSJ's Political Diary breaks down Tuesday's most interesting primary contests. Also, WSJ Columnist Mary Anastasia O'Grady translates the latest economic signals from Washington.

 

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.

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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.

[laffer]

 

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.

 

Link to WSJ article.

[dmarc117]

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.

 

whats gonna stop lawmakers down the road 20y from now from taxing these accounts when the well is dry.

[Azazello1313]

another view: Don't Believe the Double-Dippers

 

Those who want to know what is going on must sift through all of this bipartisan gloom to distinguish between (1) agenda-driven dire warnings and (2) the boring reality of a sluggish recovery being partially paralyzed by ominous threats of punitive taxes and onerous regulation.

[Avernus]

another view: Don't Believe the Double-Dippers

 

 

I think there is nothing going on that suggests we aren't going through a double dip recession and the market is looking identical to what it was in 1930....

 

what we went through was pretty much an exhibition as unemployment rates still look bad and aren't any better and the only real job openings are census workers or retail/fast food etc.....

 

we're a nation of consumers and we don't create anything....logically it's only a matter of time before we consume ourselves if China stops buying our bonds - which they may not for quite some time, but it hasn't helped us any except dig the hole deeper...

Edited June 10, 2010 by Avernus

[The Irish Doggy]

I don't care for his curve or his double dip.

[whomper]

I'm waiting for a rebuttal from John Cryer

[evil_gop_liars]

I'm waiting for Arby's double french dip sandwich...

[Duchess Jack]

I don't care for his curve or his double dip.

or the cut of his jib

[TimC]

How bad would Reagan have kicked Obama's ass?

 

 

 

 

Really bad.

[westvirginia]

How bad would Reagan have kicked Obama's ass?

 

 

 

 

Really bad.

 

Instead of pounding on the lectern with that shoe, Reagan would have beaten his nappy head with it.

[evil_gop_liars]

How bad would Reagan have kicked Obama's ass?

 

 

 

 

Really bad.

 

If the stars were aligned right and Venus was in retrograde....no contest.

[Yukon Cornelius]

If the stars were aligned right and Venus was in retrograde....no contest.

[Jimmy Neutron]

If the stars were aligned right and Venus was in retrograde....no contest.

 

[CaP'N GRuNGe]

How bad would Reagan have kicked Obama's ass?

 

 

 

 

Really bad.

 

Let's see...

 

1) Immigration problems...the tea party crowd, etc are really mad at those brown people. Enter old Ronnie.....AMNESTY!

 

2) Trouble in Iran...enter the great Jelly Bean Eater...appease them with weapon sales to funnel cash to rebels in Venezuela!

 

3) Problems in Iraq and Afghanistan...our troops get hit...enter the old Cowboy and cut and run like Beirut!

 

4) If Grenada gives us any more trouble, Ronnie will take care of it.

 

Man that old California actor was one helluva President.

[WaterMan]

Triple dip recession if there's no jobs created soon.

[peepinmofo]

It isnt a recession. It is a depression. Remember, during the depresession, they didnt call it that then. When all is said and done, this will be known as the greater depression.

[WaterMan]

It isnt a recession. It is a depression. Remember, during the depresession, they didnt call it that then. When all is said and done, this will be known as the greater depression.

 

+1 this is a bad time

[dmarc117]

It isnt a recession. It is a depression. Remember, during the depresession, they didnt call it that then. When all is said and done, this will be known as the greater depression.

 

 

+1 this is a bad time

 

 

its going to get worse, much worse.

[Avernus]

Triple dip recession if there's no jobs created soon.

 

this would be crazy because I think we're still another 6-7 months away from the 2nd dip...

[SEC=UGA]

this would be crazy because I think we're still another 6-7 months away from the 2nd dip...

 

Well, the wave tells me that we're in big trouble. What you thing Wiegie?

[Avernus]

Well, the wave tells me that we're in big trouble. What you thing Wiegie?

 

 

I knew I should have kept that boogie board from back when I was 12

[wiegie]

What you thing Wiegie?

I've been concerned for the past year and a half about the state of the financial system. Although it is not on the verge of collapse like it was in late 2008, it is still not healthy. I also think the anemic job growth we have seen is not a surprise and I expect the slow pace of labor market recovery will continue--this is going to be a long, slow haul to get out of.

 

I do NOT think that we are on the verge of either an economic collapse or hyperinflation--just a slow, painful "recovery" that will take several years.

 

And for the record again, I think people are too concerned about the current budget deficit than makes sense. Yes, the deficit needs to be addressed in the near future, but the time to freak out about it is not now.

[dmarc117]

I've been concerned for the past year and a half about the state of the financial system. Although it is not on the verge of collapse like it was in late 2008, it is still not healthy. I also think the anemic job growth we have seen is not a surprise and I expect the slow pace of labor market recovery will continue--this is going to be a long, slow haul to get out of.

 

I do NOT think that we are on the verge of either an economic collapse or hyperinflation--just a slow, painful "recovery" that will take several years.

 

And for the record again, I think people are too concerned about the current budget deficit than makes sense. Yes, the deficit needs to be addressed in the near future, but the time to freak out about it is not now.

 

 

what do you think of all these states being bankrupt? michigan's teachers pension? illinois govt pensions? how do we solve those?

 

the fannie and freddie mess?

 

serious questions.

[Avernus]

I've been concerned for the past year and a half about the state of the financial system. Although it is not on the verge of collapse like it was in late 2008, it is still not healthy. I also think the anemic job growth we have seen is not a surprise and I expect the slow pace of labor market recovery will continue--this is going to be a long, slow haul to get out of.

 

I do NOT think that we are on the verge of either an economic collapse or hyperinflation--just a slow, painful "recovery" that will take several years.

 

And for the record again, I think people are too concerned about the current budget deficit than makes sense. Yes, the deficit needs to be addressed in the near future, but the time to freak out about it is not now.

 

how much of an affect do you think the BP oil spill has had on investors? Ever since the spill started, people have been flocking to gold and silver which has caused them to break through consistently which has contradicted the trend that I've seen for the past couple of years....

 

It seems as if people are actually starting to get worried and are investing in that direction...do you see this as a big problem?

[dmarc117]

http://finance.yahoo.com/news/Doubledip-fe...set=&ccode=