Tuesday, February 02, 2010

Will Obama's Budget Kill the Recovery in 2011?

Sykes points to an interesting article on tax avoidance.

Those with the power to tax never learn from history. I've written about the "revolt of the kulaks" phenomenon in which the producers of society would rather not produce than be subjected to confiscatory taxation. A related phenomenon is tax avoidance, in which people structure their lives so as so avoid creating taxable income (for example, purchasing municipal bonds rather than corporate bonds).


Arthur Laffer thinks exactly the same way, but he paints a more vivid picture.

Arthur Laffer, creator of the Laffer Curve that showed how low tax rates boost economic growth, is warning anyone who will listen that the economy is headed for a “train wreck” in 2011 that will make the current recession look tame by comparison.

Why? It's the "Kulaks" part of Jacobson's post:

All the factors that will make 2010 (and have already made the last half of 2009) look so good will reverse direction, and 2011 will be a train wreck,” he said in his forecast.

The big reason, among several, is Obama’s plan to allow the Bush tax cuts to expire at the end of this year, and other tax increases the Obama administration intends to enact this year and next, and how businesses will respond to these tax changes.

In anticipation of known tax increases the economy will shift income and output from 2011 -- the higher tax year -- into 2010 -- the lower tax year. As a result of this income shift, 2010 will look a lot better than it should, and 2011 will be a train wreck,” he predicts.

That's entirely reasonable.

There is a group of economists, including Kasriel at Northern Trust, who believe that there will be a "double-dip" recession; i.e., that the current uptick will be followed soon, maybe late this year, by a downtick. They don't mention tax increases as one of the causes, however.

It's possible, then, that BOTH tax-increases AND a 'natural' dip could combine for a truly dismal 2011.

Unless Obama gets us into World War Three, which was the salvation of FDR.


J. Strupp said...

Art Laffer-the guy who believed lower corporate/top income tax rates would benefit middle class Americans by creating jobs and lifting real wages for everyone. 25 years later. We've had neither.

Off topic. The period 1945-1980 was stronger, not only in middle class real wage growth, but also the avg. % Americans employed. Corporate/top income tax rates during this time period averaged more than TWICE the period 1980-present. Listening to Laffer is nuts.

Secondly, 2010 will look better than 2011 because of the ongoing inventory rebuild boosting GDP. It's not about taxes moving up a WHOPPING 2% back to the olden days of 2003, it's entirely about DEMAND not being sufficient enough in 2011 to pick up the slack in the economy once government stimulus dollars peter out.

And last....

"Unless Obama gets us into World War Three, which was the salvation of FDR"

You mean the time period when the government paid businesses throughout the country hundreds of billions of dollars to build weapons of war? The same time period when corporate tax rates were more than 90%?!!!!

Classic dadster. Just classic.

Don't listen to these guys. They're idology has been a complete failure.

Dad29 said...

Oh, I don't think Laffer is 100% correct on everything.

But he IS correct in saying that people will manage their tax liabilities, if they can.

J. Strupp said...

...and they still do now.

...and actually, I don't have a problem with anything that pulls aggregate demand forward in time to boost GDP. I wouldn't have much of an issue with Laffer's assertion if I actually believed what he's saying.

That being said, while the threat of tax increases are obviously on the minds of every corporation in this country, I strongly believe that the lack of future demand is what scares business owners most. Cap EX will not improve if you have no need for expansion/equipment etc., company's won't push product out the door faster to avoid tax increases if they think they'll have to sit on the inventory for a long period of time. They won't push production forward if it means they have to drain cash reserves to do so. Not on average they won't. Demand (or the lack thereof) is trumping everything right now.

That's not to say the tax cuts shouldn't be extended on a temporary bases, given our current situation.

neomom said...

The folks ain't buying stuff when they don't have jobs, took pay cuts/furloughs, think they may lose their job or believe that their monthly expenses (gas/utilities) will go up.

If the folks ain't buying, the widgets ain't being produced.

In other words - its the uncertainty stupid.