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Laffer: “Economy Will Collapse In 2011”

From the opinion page of the Wall Street Journal:

Tax Hikes and the 2011 Economic Collapse

By ARTHUR LAFFER

June 7, 2010

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…

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…

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.

Mr. Laffer is the chairman of Laffer Associates and co-author of “Return to Prosperity: How America Can Regain Its Economic Superpower Status.”

We don’t usually post editorials, but Mr. Laffer has proved that he knows whereof he speaks.

This article was posted by Steve on Monday, June 7th, 2010. Comments are currently closed.

21 Responses to “Laffer: “Economy Will Collapse In 2011””

  1. heykev says:

    Providing I survive through 2011, at least I can take some solace in knowing that BHO will serve one term. However, the damage he has caused will take decades to recover from.

    I doubt we will recover from it in my lifetime. Economic maybe, but not from his appointments and the laws they will create ex nihilo.

    • clvasque says:

      Given the state of the U.S economy is essential to have responsible politicians with strong understanding and knowledge of the financial sector to secure and promote economic growth in America. Political candidates such as Ryan Brumberg focus on the attempt to built a strong and confident market to help increase our economy. The Brumberg campaign promotes smart economic solutions to better the economic conditions in America. Brumberg aims to prevent taxes from increasing in January 2011 by stimulating our economy with revenue neutral corporate tax reform by closing loopholes and lowering tax rates. His goal is to simplify the tax code to free the $200 billion currently spent each year in tax compliance along, and in the long run this will serve a purpose to stop Washington from bankrupting our country.

    • confucius says:

      clvasque,

      How embarrassing. You posted almost simultaneously as brumberg2010. (See below.) You should’ve waited at least one hour.

      If I didn’t know better, you’re the same person as brumberg2010. And if not, you’re at least working for Ryan Brumberg.

      You need to improve your astroturfing skills because this was embarrassing.

      Hell, I’m embarrassed for you.

  2. jobeth says:

    “Economy Will Collapse In 2011”

    Just great…That made my day….

    I knew this truth was coming but seeing it in black and white is not so good for your mood.

  3. Gil says:

    I see.
    So the plan is to LOSE to the GOP in the fall.. then saddle them with the blowback from the collapse of the economy which they created by their government spending, saying that THEY (the GOP) were the ones in power when it happened, not us! So then the Dems can retake seats of power in 2012.

    Will the public be sufficiently informed not to make that knee-jerk assessment and throw out the GOP as incompetent? Well… do they think the LAST crisis of the housing bubble was due to the incompetence of the Democrat party or the GOP (who was in power)?

    I guess we can always hope the public to grow brains between now and then.. and wake up. Thanks to S&L for being an oasis of truth in the midst of it. I hope such as visit and speak here will be enough to stem the tide and keep on course and not ruin the country (in 2012). Can you imagine another term of this starting from 2012? What would they do then, like they pushed through Health Care.. maybe the Immigration “reform” they want so badly..

  4. proreason says:

    At least it should seal the Moron’s fate.

    However, don’t forget that the marxists were able to dodge the bullet for the crash of 2008. (Perhaps because it was so unexpected, and because they timed it so close to the election. Remember, both Paulsen and Bernacke issued rosily optimistic statements about the economy in the summer of 2008. And the crash began Sept 8 when Lehman Bros was attacked, picked up steam Sep 17 when Soros et al did their momumental Money Market run, and reached the apex in October when Bush pissed off conservatives even more with Tarp. The events were so incessant that people felt like they were being slugged daily by a heavyweight boxer. By Nov 4, many seniors life savings had been cut in half, and the retirment prospects of anybody over 45 were delayed by at least a decade. And that doesn’t count people who knew for a fact by then that they would lose their homes.)

    So don’t be surprised by mind-bogglin events in the next two years. The greatest criminals who ever lived are not going to give up their dream of unstoppable power and wealth without a calamitous war. Don’t put ANYTHING past them……including starting a war in the Middle East, abetting terrorist incidents, martial law, a staged assasination, an amnesty cram-down, and much much more.

    It wouldn’t surpise me to learn that they have planned all along on another crash in 2011, and have a plan to “take advantage” of that one as well. If it happens, there will be tens of millions more people on the dole. And who do you think will contol the dole in 2011? Who will be in charge of the military? If they start a war, who will have wartime powers? (but they don’t need wartime powers…..they haven’t paid attention to law, precedents or history yet. Why would they act differently if they think they will lost their tyranical powers in an election?)

    Yep…….our own little Stalin.

  5. Right of the People says:

    I’m putting some hope on the GOP taking back the congress then starting impeachment proceedings ASAP. Might be the only thing to save us. With Joe the Bumbler in there they will have lost their power and we might be able to revoke the worst damage.

  6. confucius says:

    From http://www.brumberg2010.com:

    Brumberg2010: Fiscally Conservative, Socially Liberal

    Smart Governance

    Create A Bipartisan Coalition – The problems facing our country are too severe to allow politics—Democratic or Republican—to guide national decisions. In order to maximize my impact, I will form a coalition of 15-20 Democrats and Republicans whose opinions might differ on social issues, but whose dedication toward fact-based solutions is consistent. Given the gridlock in Congress, this centrist group would become the deciding vote on key issues and could drive real change in Washington.

    We already have this centrist group, Mr. Brumberg, and they include a notorious Gang of RINOs—e.g. Susan Collins, Olympia Snowe, John McCain and Lindsey Graham. They are a part of our problem, sir.

    So with all due respect, no thanks.

    Smart Healthcare

    Singapore provides an interesting counterpoint to the American system. In Singapore, the government offers universal healthcare subsidies and catastrophe insurance, but co-pays are sufficiently high (almost 50%) to make its citizens price- conscious. As a result, doctors and hospitals compete over price, as well as quality—resulting in a world-class healthcare system at bargain prices. Singapore pays only ~4% of its GDP on healthcare, as opposed to ~11% in France, and over 15% in the U.S. Allowing insurers to offer cheaper premiums with higher co-pays would help control healthcare costs in the U.S. …

    So Mr. Brumberg, you want universal healthcare AND higher copays? I’m no Ivy League lawyer like you, but your plan sounds worse than what your fellow Ivy League lawyers just passed.

    Again, no thanks.

    Smart Healthcare

    Reform Medical Malpractice – Ensure patient needs, not legal considerations, come first when doctors make decisions. …

    That’s not a policy, sir. That’s a talking point. Details please; until then, no thanks.

    And what are your “conservative”/liberal positions on abortion, gay marriage, charter schools, illegal immigration, Iran and North Korea?

  7. crosspatch says:

    I have been saying that 2011 would be the year the wheels fall off the cart but for completely different reasons. 2011 is when the babies born in ’46 hit 65 years old. In 2007, 2008, and 2009 the number of adults reaching 65 has declined each year as their birth rates for those years of birth were declining (the men were overseas in 43, 44, and 45). Next year there is a huge spike in the number of people reaching 65 and an even larger spike in 2012. Then it levels off for a bit before ratcheting up again. By 2025 the number of people entering Social Security will be twice the number this year (birth rate in 1960 being about twice what it was in 1945).

    At the same time we appear to have the conditions setting up for a deflationary economy. In deflation, every form of real investment becomes a loser. Real estate, gold, anything tangible loses value. It is even possible for certain interest rates to go negative under those conditions. In a deflationary economy, the only safe place for your money is under the mattress.

    So now we have the setup for a “double whammy” because as people are engineering ways to get around the new tax increases by reconfiguring their investments and practices, the real value of things goes into decline. This results in even less tax revenue from what is taxed. If an estate is declining in value, it becomes in the government’s interest to speed your demise because every year that you remain alive, the government is losing potential revenue.

    Social security is set to begin cashing in those “trust fund” bonds for Congress to pay at the same time tax revenues are declining and government debt is skyrocketing. Congress will have no choice but to try to cover one credit card with another. They will have to pay the special Social Security bonds with standard treasury bond issues because they don’t have the cash to cover it. That means that with no increases in budgetary spending, deficits will *still* increase because those Social Security bonds are basically bearer bonds that must be cashed when presented.

    This country is headed for a complete fiscal meltdown in 2011 and 2012 that probably won’t reach its peak until 2025 or so and it is all based on this Democrat notion that the government is responsible for providing income and medical care and food and rent subsidies and all sorts of other things to people.

    The cupboard is bare. The *only* thing that has saved us in the past few years is the fact that the birth rates from 1943 to 1945 were declining (quite rapidly, too) and so fewer new people have been reaching social security age.

    Our grandkids are going to inherit a mess and they are probably going to end up snuffing a good number of us to get themselves out of it. I don’t think the 25 year-old kids 10 years from now are going to take kindly to a flock of us geezers collecting a check every month while they aren’t going to be able to afford a home to live in. There is a reason Congress had those “death panels” in that health care legislation.

    • proreason says:

      All true and very well stated.

      We are closer to being Greece than anybody wants to let on.

      Chris Christie and Paul Ryan are the only solutions to fiscal doomsday.

      But if they or people like them win and actually ACT, then there will be an unprecedented boom. The United States will quickly become the only safe harbor in the world for investment and the jobs and innovation will make this country multiples wealthier than any other country in the world. We will have to build rivers of acid to keep people out.

      And that brings up another interesting point.

      There doesn’t appear to be hard-nosed, numerically astute, fiscal hawk around who will also satisfy the most socially conservative.

      Some people are going to have to decide whether the survival of the country trumps the their social concerns (ps, I’m not criticizing either group, just pointing out what seems like an obvious decision that voters will have to make before Nov 2012, unless a miracle happens and Reagen is reincarnated.)

    • crosspatch says:

      What we need is a candidate with a college degree in economics rather than law. The last one we had was Ronald Reagan. If I were an up and coming Republican politician, I would be going back to school right now getting an economics degree from somewhere that emphasizes Friedman economics.

    • proreason says:

      “we need is a candidate with a college degree in economics rather than law”

      I’ll agree, but only because lawyers are a cancer on the country, not because a degree in economics is important…..it appears to me that economists are to the economy as weather scientist are to the weather (i.e., useless).

      What is needed more is common sense.

      And the most basic common sense is this: when you have a country that rose from outpost status to the most successful of all time in two centureis, KEEP DANCING WITH THE ONE THAT BRUNG YOU. To me that is the most mind-boggling thing of anything in this unbelievable mess. Change the country that made people free? the country that created more wealth in 230 years than the rest of mankind created in all of history? the country that abolished slavery? the country that defeated the Nazis, the Communists and FDR? the country that made women equal partners with men? the country that has invented more life saving devices than all others compined? The country where poor people have 2 automobiles, and ipods, and cell phone plans and air conditioning? Are you CRAZY?

      And the people who voted for the criminals in power are crazy.

    • Steve says:

      “What we need is a candidate with a college degree in economics rather than law. The last one we had was Ronald Reagan.”

      Well, George W. Bush did get an MBA from the Harvard Business School. Indeed, he is the only US. President to have earned an MBA.

  8. crosspatch says:

    “economists are to the economy as weather scientist are to the weather”

    Oh, you misunderstood me. I don’t want an economist. I want someone with a degree in economics. Reagan wasn’t an economist but he could understand what they were talking about. Reagan was an actor and politician (same thing) but he knew what Prof. Laffer was telling him and he could understand what Prof. Friedman had to say. He understood “Chicago school” economics.

    Obama would do well to listen to what Prof. Walter Williams has to say on things but he might not be able to understand it.

    • proreason says:

      yep.

      At the heart of it, I think, Reagen understood that people who are free will accomplish amazing things.

      In a way, it’s cultural evolution. If you remove the restraints from human beings, millions of people experimenting with different solutions to life’s problems will come up with solutions that no small group of people could ever image. Doesn’t matter if the small group is full of braniacs. Millions of average brains are thousands of times better than a few hundred super brains.

      This country is the fullest expression of that obvious rule of life. Yet we have people like the idiot in chief who demand that their tax cheat harvard buddies can do better than 300 million free men. It is crazy stupid.

      But of course, they aren’t trying to convince us because they believe it themselves. It’s just their magic act. What they really want is to own and control everything themselves. All of their energies are devoted to lying, and none whatsoever to making life better.

  9. JohnMG says:

    ……” the country that created more wealth in 230 years than the rest of mankind created in all of history…..”

    The irony here is hard to comprehend. Nothing succeeds like success and the only reason the current crop of socialists were/are able to assault the country as they have is due to the very success of the country in the first place. The greatest social experiment in the history of mankind is about to be undone by the ignorance or arrogance of the socialist spawn who can’t or won’t recognize the superiority of the capitalist system.

    Or maybe they DO recognize it and are poised to steal the fruits of true patriots labors. In any event, they are criminals against mankind and should be dealt with in as such. The first big opportunity begins in November.

    • proreason says:

      “Or maybe they DO recognize it and are poised to steal the fruits of true patriots labors”

      That’s what I think.

      The path of history is impossible to miss. Plot progress any way you choose (lifespan, creature comforts, mastery of nature, amount of labor to feed a person or create shelter, liesure time, people receiving higher education, patents, inventions, freedom from disease, etc.,etc.,etc.) and you will find that there was slow but sporadic progress until free markets took hold. Then, by any measure, progress has skyrocketed to the point where people below the poverty line in the US live longer (by far) and have better lives than aristocrats had in the mid 18th century.

      Since so many liberals have complete access to what we know about history, they are well aware of this plain hard fact.

      But they don’t care.

      There was an interesting study a couple of weeks ago. They asked people whether they would rather make (a) $50,000 when the average was $25,000 or (b) make $100,000 when the average was $200,000. A strong majority picked a. They would rather have less wealth but feel superior.

      And that’s how the marxists / oligarchists / tyrants see it. They would rather rule over an impoverished world than be one of many in a world where everyone is wealthy. After all, THEY are the geniuses. They tell us all the time. And what good is it to be a genius when a Sarah Palin or an EE with a bright idea can be wealthier than you are. This is why sending the world back to the Stone Age is perfectly fine with them.

      They not only want to rule, they want to make absolute sure that their rule will never again be challenged.

      That’s what world politics is about today. It is not longer about nations in conflict. It’s about people who see themselves as intellectually superior (Brussels, Obamy, Krugman) or morally superior (Islamists, Queers, Femi-nazis) in conflict with the rubes. WE are Obamy’s “Jewish problem”.

      And that is also why Obamy bows down to every 2-bit tyrant. His affinity is with THEM, not americans. We are his stupid bitter subjects. They are his peers. He wants to do away with America as quickly as possible, because those anglo-saxon rubes have a habit of rising up against intellectual superiors like him, and we have a tendency to get violent with guys like him.

  10. skclewis says:

    There’s another aspect of the economy that has not been mentioned…the tax-free zone in the Middle East. Anyone working in the Middle East is exempt from paying income tax on the first $88,000 of income. It is a benefit defense contractors like me enjoy while supporting our troops. The troops too enjoy that benefit. If the Congress of Thieves realizes this and ends the exemption, there will be even more economic trouble. Though there would initially be a surge of tax revenue, it would quickly dry up. When people realize they don’t have the benefit there is no incentive to work overseas which will add to the unemployment rolls in the U.S. as well as limit the support the troops have. The troops too will suffer because with it they are able to have more disposable income for their families and savings. Those of us who have served know all too well how low the salary is for those serving our country. So when they too are hit with the higher tax rates that will enlarge the impact back home. Where is Uncle Ronnie when we really need him?

  11. Reality Bytes says:

    Yo Pro! Obamanomics Explained – an’ here it tis…

    http://www.youtube.com/watch?v=7jukQX2pl2Q

  12. Reality Bytes says:

    LOOK AT DEM CAKES! by James Brown comes to mind. Life Imitating Art x Infinity


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