[W]hen the U.S. economy comes to 2011, the train’s going to come off the tracks. . . . The tax boundary that will occur on January 1 , 2011 tells me that GDP growth in 2010 will be some 6 percent to 8 percent higher than GDP growth in 2011 . A year on year decline from trend of some 6 percent to 8 percent in 2011 growth would represent a larger collapse than occurred in 2008 and early 2009 .
Ferrara includes this helpful and rather cheerless chart to emphasize what Laffer predicts:
On top of that, the government won’t see the revenues it expects, either:
President Obama’s budget projects that his tax increases on “the rich” (singles making more than $200,000 and couples making more than $250,000) would raise $678 billion in increased revenue during the next 10 years. The ObamaCare legislation projected another $210 billion from the increased payroll taxes on those workers for a total of nearly $1 trillion. But these tax increases won’t raise anywhere near the revenue projected. Obama will be lucky if this tax piracy doesn’t result in less revenue. …
The projections of higher revenues from the other tax rate increases all fail to take into account the negative incentive effects discussed above and the counterproductive interactions from all those effects. Since we know from experience that those incentive effects are powerful and real, the result at a minimum will be less revenue than expected, if not less revenue overall.
All of this is based on the assumption that the changes in tax policy sets up no other incentives or changes any behavior. Of course it does, though, as do even threatened changes. This is called a static analysis on tax policy. Ferrara believes that the economy may actually look better than it is this year because capital holders are moving gains and income into 2010 to avoid higher taxes next year. After we hit the tax boundary, all the incentives go the other direction, and that means negative growth across the board. Essentially, that is why capital is moving about the economy, albeit at a slow pace. Businesses are shoring profits by selling assets, limiting hiring or sitting on savings. All of this to be ahead of the potential costs
Congress left Washington without addressing the massive tax hikes that will come at the end of the year as the tax-rate reductions of 2001 and 2003 expire. Absent action on Capitol Hill, those increases will take $4 trillion out of the economy over the next ten years — and even if the lower tax bracket reductions get extended, $700 billion of capital will get redirected from the private sector to Washington. How do you think that will that impact economic growth in the US?
