Arthur Laffer: Likely stock market tumble next year

Tax Hikes and the 2011 Economic Collapse


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.

Comment: By Arthur Laffer of the Laffer curve

1 comment:

  1. Back in the 60's Democrat President John F. Kennedy gave a speech to an Economic CLub in New York about the importance of lowering taxes so the Gross National Product would grow and the overall taxes would increase despite the lower marginal tax rates. President Reagan followed the same principal. Arthur Laffer put what Kennedy and Reagan said on paper graphs. Lower marginal tax rates work despite what progressive communist have indicated. Obama please learn from ohter great leaders like Kennedy and Reagan. Obama is catching on..even though he wants to steal our wealth, Obama is hoping the economy wil grow enough, so he has a chance to be re-elected. I sure hope Obama the marxist is defeated in 2012.


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