Monday, June 07, 2010

Arthur Laffer Predicts Doomsday: January 2011

...and Laffer is no slouch, having drawn up the now-famous "Laffer Curve" (which states that increasing tax rates beyond a certain point will become counterproductive for raising further tax revenue because of diminishing returns, and/or that a decrease in tax rates could result in an increase in tax revenues) on a cocktail napkin during an afternoon meeting with Nixon/Ford Administration officials Dick Cheney and Donald Rumsfeld in 1974 to help illustrate his argument...

I figure a guy that can come up with the economic equivalent of E=MC2 on the spur of the moment on the back of a dirty napkin is worth listening to, especially as we saw (during the Regan Administration) that the guy really does know what he's talking about.

So let's listen to what he has to say about unfolding economic developments and the policies of the administration now in power, and how it will affect us:

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.

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.

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.....

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....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.

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.
The result will be a crash in tax receipts once the (2010) surge is past. If you thought deficits and unemployment have been bad lately, you ain't seen nothing yet.

Thanks for the stomach-ache, Arthur...and if you don't want to hear from any Reagan-era "holdovers" or need a second opinion, try Anthony Fry, senior managing director at Evercore Partners. He was on CNBC this morning:

Fry sees three outcomes for the global economy and none of them makes very good reading.
“You can have lower rates and deflation, higher rates and higher inflation or the nightmare scenario of higher rates and deflating asset prices,” he said.
“If the nightmare scenario plays out as I suspect it may then the debt situation gets worse. There is currently no exit strategy and the reaction to the crisis of policy makers remains a big worry.”

As a result, Fry is telling investors to play it safe and buy physical assets like land.
“I don’t want to scare anyone but I am considering investing in barbed wire and guns, things are not looking good and rates are heading higher,” he said...

So between the brightest minds of yesterday and today, we get a common refrain: It's all about to go to hell. Buy land, surround it with barbed wire, and stockpile plenty of ammo. And assume your assets are about to be worthless.

But based on prior performance, I am sure Barack Obama is up to the challenge of this upcoming crisis...right?

Hello? Anybody home? Hey, where'd everybody take off to...?

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