Economic Time Bomb

[Skull Pilot]

An Economic Time Bomb - WSJ.com

Weather-wise it has been a very cold January, and politically the Scott Brown Senate victory has chilled Washington Democrats even further. But if the Democratic economic policies continue nevertheless, this year will be nothing like the bitter economic January we will be living in a year from now.

Government spending has already hugely increased, and so has the size and scope of government, but next year there will also be substantial tax increases for a great many Americans. The first reason will be the expiration of the Bush tax cuts . The top personal income tax rate will rise next Jan. 1 to 39.6% from 35%, a hike of nearly one-eighth. The dividend tax rate will rise to 39.6%, more than 2½ times the current 15%. And the capital gains tax rate will rise by a third, to 20% from 15%. If the House health care bill had passed, all three of these rates would have risen to 45%.

The estate tax, which fell to zero this year under the Bush tax cuts, will return in 2011--or sooner, if Congress acts to restore it. Another likely tax increase will be on the income of private equity and hedge-fund managers, from the capital gains rate of 15% to the new higher income tax rates. It has already been passed by the House and is supported by the Obama administration, as is an additional 10-year, $90 billion tax on banks aimed at "rolling back bonuses for top earners." It would affect some 50 banks, insurance companies, and large broker-dealers.

Meanwhile a number of last year's tax deductions have disappeared due to the failure of Congress to extend them into this year. The tax deduction for state and local sales taxes is one; the deduction for college tuition and fees is another; and the 50% write-off for small businesses for capital purchases--equipment, machinery or building a new plant--has disappeared as well, which will have a negative effect upon the construction of new business operation facilities.

Add on to all of these increases the biggest government deficits and spending increases (to 26.5% of gross domestic product from 21%) in half a century, the protectionism of free trade downsizing through the "buy American" requirements, China import restrictions, and the administration limitations of Columbia, South Korea, and Panama free trade agreements, and we have a very different, and not very prosperous, America ahead of us.

Or as economist Arthur Laffer wrote in his January Economic Outlook, we "cannot have a prosperous economy when government is overspending, raising tax rates, printing too much money, over-regulating and restricting the free flow of goods and services across national boundaries." We are, in his words, simply "moving in the wrong direction."
***

But what Mr. Laffer sees as most important is a substantial American economic collapse coming to us in 2011. His reasoning is simple and sensible: the impending 2011 tax increases will lead Americans to get their incomes into this year and pay the current lower tax rates. That will mean a 2010 GDP growth 3% to 4% higher than it otherwise would have been, and that will look very good.

]But when the huge tax-increase agenda arrives a year from now, the economy will begin to decline, and will be some 3% to 4% smaller than it otherwise would have been. The artificially high growth in 2010 followed by artificially low growth in 2011 would "represent a larger collapse than occurred in 2008 and early 2009," Mr. Laffer writes.

He also points out that there is a four- to eight-month gap between market performance and economic performance. Indeed, the market has often reflected good or bad tax news four to eight months ahead of their impact on the economy. We historically saw that after the Harding tax cuts (1922), the Smoot-Hawley tariff bill (1929), the Kennedy tax cuts (1963) and the Reagan tax cuts of 1983. If this pattern repeats, we could see the market begin to deteriorate sometime in the summer or fall of this year.

In modern times the Kennedy, Reagan and George W. Bush tax rate reductions helped spur economic growth. the Obama tax rate increases will have the opposite effect. Americans headed to the polls this fall, worried about the increasing size and spending of the federal government, possibly a falling market, and next year's looming tax increases, may reproduce next November the voter revolt we saw in the 1994 congressional elections. That led to a Democratic presidency and a Republican Congress, which together were better for the American people than the full-scale liberalism we see in the current administration.

Do you agree with these predictions?

 

[strollingbones]

i agree that your post will be checked for copyright violations....

i have no clue where we will be a year from now..the democrats have totally blown the chance to make a difference....

 

[Skull Pilot]

i agree that your post will be checked for copyright violations....

i have no clue where we will be a year from now..the democrats have totally blown the chance to make a difference....

I posted the link to the article so what's your problem?

 

[The Rabbi]

People have trouble with the truth.
The article is spot on. People ridiculed the Bush tax cuts as giveaways to the rich (they always do). Now we will see what their repeal will mean.

 

[uscitizen]

Repeal or letting expire?

 

[Skull Pilot]

Repeal or letting expire?

same result

 

[uscitizen]

Repeal or letting expire?

same result

Yes but spin and a different political impression when you say repeal.
They will go away if congress doesn't act, not go away because congress does act.

 

[Skull Pilot]

semantics

doing nothing is still a choice

 

[editec]

The estate tax, which fell to zero this year under the Bush tax cuts, will return in 2011--or sooner, if Congress acts to restore it.

The estate tax isn't ZERO.

Meanwhile a number of last year's tax deductions have disappeared due to the failure of Congress to extend them into this year. The tax deduction for state and local sales taxes is one;

Congress doesn't control STATE AND LOCAL SALES TAXES.

Man, the WJS editors need to wake up, that's all I have say about this article.

 

[uscitizen]

We lost a lot of tax deductions under Reagan as well. Did the right whine about that then? I don't recall it.

 

[Neubarth]

Meanwhile a number of last year's tax deductions have disappeared due to the failure of Congress to extend them into this year. The tax deduction for state and local sales taxes is one;

Congress doesn't control STATE AND LOCAL SALES TAXES.

Man, the WJS editors need to wake up, that's all I have say about this article.

You are right, Congress does not control State and Local Taxes, but that was not the commentary. The issue is the deduction of State sales taxes on Federal Taxes. That is no longer there according to the article. Ungood for those of us who itemize.

 

[Neubarth]

Raising taxes usually results in a slowing economy months later. That is not good. It especially is not good considering how messed up the economy is right now.

 

[Skull Pilot]

The estate tax, which fell to zero this year under the Bush tax cuts, will return in 2011--or sooner, if Congress acts to restore it.

The estate tax isn't ZERO.

Meanwhile a number of last year's tax deductions have disappeared due to the failure of Congress to extend them into this year. The tax deduction for state and local sales taxes is one;

Congress doesn't control STATE AND LOCAL SALES TAXES.

Man, the WJS editors need to wake up, that's all I have say about this article.

The Federal deduction for state and local taxes paid is gone.

Maybe you need another cup of coffee

 

[Skull Pilot]

We lost a lot of tax deductions under Reagan as well. Did the right whine about that then? I don't recall it.

Reagan and Bush 1 or Bush 2 are no longer president

Last time I checked, Reagan was dead.

Do you have anything of substance to offer on the predictions made in the article?

 

[The Rabbi]

Reagan might be dead but I suspect he has more influence than Obama.

 

[uscitizen]

Reagan might be dead but I suspect he has more influence than Obama.

And so does Boosh on our current situation.