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"One single object...[will merit] the endless gratitude of the society: that of restraining the judges from usurping legislation." -President Thomas Jefferson-

"Don't get stuck on stupid!" -Lt. Gen. Russel Honore-

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Monday, June 7, 2010

Tax Hikes And The Coming 2011 Economic Collapse

Arthur Laffer is probably best known for the "Laffer Curve" which showed the relationship between tax rates versus government income from taxes. In essence, lower tax rates translate into more government revenues. This theory has been tested time and time again against empirical data and has been shown to be extrememly sound.

But today, he has penned a very prophetic essay for the Wall Street Journal in which he shows exactly how allowing the Bush Tax cuts to expire will hasten the collapse of the U.S. economy beginning in January of 2011.

From his article:

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.

... [I]t'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 do not like to go to work only to see their money confiscated by the government and given to someone who did not work to earn that money. Along the same line of logic, those who get money without having to work for it will never want to work.


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.

The people who see this coming will do something this year to avoid the massive losses they will face next year when their taxes will dramatically go up.

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.

This is in contrast to the Reagan tax cuts, a fair bulk of which did not take effect until January 1, 1983, after which the economy took off like a bat out of hell. The coming tax cut expirations (which Barack Obama and the Democrats are more than happy to allow) will have the exact opposite effect of the Reagan tax cuts. When this happens, we really will have the worst economic crisis since the Great Depression and only Barack Obama and the Democrats can be blamed. Of course, Obama and the Dems will try to assign blame everywhere else.

And if you have retirement accounts that will be affected:

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.

Get ready. The Obama Depression is just around the corner and the President is travelling for photo-ops and parties instead of taking steps to effectively deal with it.

You can access the complete column on-line here:

Tax Hikes And The 2011 Economic Collapse
Arthur Laffer
Wall Street Journal
June 7, 2010

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