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  • Double Dip?

    Tax hikes helped the U.S. economy go from downturn to depression in 1932.Throughout the mid-30s there were glimmers of economic recovery until taxes were raised again in 1937, helping send the economy into another recession. So, why would it be smart to raise taxes now during such a fragile economic recovery?

    Art Laffer, once a member of President Reagan’s Economic Policy Advisory Board, explains why tax hikes in 2011 are going to depress output, production and reported income. The result, he says: a dreaded double-dip recession.

    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.

    Consequently, to the extent that we are having a genuine recovery, much of it is the result of future income realizations, production and demand being shifted from 2011 into 2010. Why? Because it’s cheaper. Economic incentives work. Just take a look at “Cash for Clunkers.”

    We argued at the time that despite its popularity the program is likely doing little for the economy or for American consumers. Rather than creating new demand, the program may actually just be causing consumers to make purchases a few months earlier than they otherwise would have.

    Sure enough, the month after the program ended the Washington Post noted: “General Motors’ sales plunged 36 percent in September compared with August. Ford plummeted 37 percent. Chrysler dove 33 percent.”

    The same shifting effect will result from the Bush tax cut expirations.

    Laffer reasons:

    [T]he 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.”

    A real economic recovery involves returning certainty to the marketplace. The way to do that is to make it easier for businesses to plan ahead. If job creation is the number one concern, adding future tax increases to business’s worries is not a way to do so. However, extending the Bush tax cuts is the surest way to prevent further job loss.

    Posted in Ongoing Priorities [slideshow_deploy]

    5 Responses to Double Dip?

    1. HawkWatcher, Mi. says:

      History doesn't matter, the Democrat statists will not allow the Bush tax cuts to continue. They are furiously looking everywhere and anywhere they can, intending to seize more of our earnings to fund their ever-growing redistribution. But it will never be enough.

      The built-in expansion of the Welfare State of America is set on auto pilot until the country goes bankrupt. Dependency on the federal government is so entrenched in our society that few politicians will even talk about the future fail. We can fix this by throwing the bums out.

      There are very few incumbents that deserve our vote. I count zero Democrats or Independents, and a handful of Republicans. This is why I directly support tea-party minded candidates who have the guts to stand up against the welfare state. We need every conservative to vote the primaries and in November, or big government wins and liberty loses. If we voters send a large number of regular Americans to Washington, we can actually be represented, avoid a crushing double-dipper, and return to a limited constitutional government that encourages us to thrive instead of taxing us out of existence.

      Our founders told us what to do when our government does not serve us. First: the vote. Second: the courts. If steps one and two fail, repeat the revolution. Please vote…my guns and trigger finger are a little bit rusty, and I'd prefer to keep it that way.

    2. kevin habibe says:

      Wow – extending bush tax cuts surest way to prevent further job loss? What economic world do you live in? Every top economist will tell you and show you evidence of how wrong you are. Extending tax cuts for the highest income earners is about the least effective way tt stimulating the economy and increasing jobs. Where have you been since teh tax cuts were passed 2001 and 2003? Did you not notice how awful the job market was under Bush compared to the Clinton years?

      Under Clinton, 216,000 jobs per month created. Under Bush and his tax cuts, 11,000 jobs per month were created. And under Clinton, in 1993, there were 4 straight years of surplus – thanks to the 1993 budget act that no single republican voted for.

      Easy to see based on history of last 3 decades, the Democrats have far better knowledcge of how to create jobs and create surpluses than Republicans, yet somehow the american people are fooled by the becks of the world.

      Look at the facts and history people – not very hard to do. Republcians don't have a leg to stand on when it comes to jobs and economy – not a single leg.

    3. MyAIC, Arizona says:

      The Effect of a Dividend Tax Hike

      The tax rate on dividends will likely rise from 15% to 39.6% next year (a 164% increase). That hike will affect average Americans of all stripes – in 2007, 65% of taxpayers reporting dividends had incomes less than $100,000, and dividend-paying stocks have long been considered "safe enough for widows and orphans."

      The hike could also affect the ability of utilities to attract the investors they need to finance important infrastructure projects – new power plants and transmission lines, renewable energy projects, upgrades to water and wastewater facilities.


    4. doug van wyk eagan, says:

      Sure, Bush was wrong to spend so much money. But BHO is taking it to the next level. It's HIS policies (not Bush's) that will drive us deeper into the debacle. It's gonna get ugly.

      David, you're a smart guy.

    5. Chuck Edmonds, Linco says:

      Basic economic principals of supply and demand appears to be a subject that the current administration and current legislative branch in D.C. refuse to accept. The spend now, tax now, blame game montra has moved us to a point where I am worried about what kind of country my kids and grand kits will inherit. Thanks for the good article. I will be sharing it with my adult children on Father's day.

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