Posted on 06/16/2010 6:24:06 AM PDT by SeekAndFind
Policy matters--especially tax rates. Over time few things affect economic activity more than absolute and relative tax rates. In addition, changes in tax rates, particularly when they can be anticipated ahead of time, can also result in shifts in the timing of economic activity.
Recently, Arthur Laffer--prominent economist and inventor of the Laffer Curve--fretted about the economic impact of the expiring (2003) Bush tax cuts. In a Wall Street Journal opinion piece he wrote that the tax hikes would lift growth in 2010 but cause a double-dip recession in 2011 when the rates actually went up.
Laffer cites the early 1980s--when Ronald Reagan phased in his tax cuts between 1981 and 1983. This caused the recovery to be put off until 1983, when tax rates were finally cut fully. But it's 1993, not 1983, that offers a more accurate historical example. President Clinton lifted the top marginal income tax rate from 31% in 1992 to 39.6% in 1993 (or 42.5% if the 1993 Medicare tax hikes are included).
The economy grew at a 4.3% annual rate in the last quarter of 1992, the same pace as 1992 as a whole. Then in the first half of 1993 the economy grew at only a 1.7% annual rate. So it seems clear that some activity that otherwise would have happened in early 1993 got shifted into late 1992 to avoid higher tax rates.
But once this was past, the economy accelerated. Real GDP grew 3.7% at an annual rate in the second half of 1993 and then 4.2% for the full year of 1994. No recession.
(Excerpt) Read more at forbes.com ...
* Back in 1993 the Federal Reserve was holding the federal funds rate at 3%--a clear policy of easy money. This helped offset the impact of the tax hikes and kept the economy growing. They can do it again.
* income tax hikes scheduled for 2011 are less severe than those of 1993.
Raising the top tax rate from 35% to 39.6% is not good policy, but it's smaller than the tax hike the U.S. weathered two decades ago.
* There is a huge election in November that could dramatically change the course of policy.
* Back in the mid 1990's, once the Fed lifted interest rates and withdrew monetary stimulus, Bill Clinton signed laws pushing free trade, welfare reform and capital gains tax cuts. All of a sudden, the economy had a nice tailwind. The late 1990s experienced an economic boom despite higher marginal tax rates on regular income.
* The last time tax rates went up like they are scheduled to in January the economy did not fall into an immediate recession.
* While they disagree with Laffer about the ill effects of the tax hikes in 2011, they agree that OVER TIME higher tax rates in the U.S. will help shift business toward countries with lower tax rates.
two decades ago we did not have socialized medicine or the libtards in charge of the Senate, the House and WH or a 13 trillion dollar debt!
Tax increases in a bad economy are like the old medical practice of “bleeding the patient.” If the patient gets worse, bleed him some more. If the country gets worse, raise the taxes more............either scenario winds up with a dead patient...........
One of the major cause of the boom of the 1990s was cheap energy. Everyone forgets that in the last half of the 90s gasoline averaged around $0.99/gallon. Asia was suffering a recession at the time. Today this isn’t the case.
Yes, I would agree that in a small business taxes and tax rates are a lower priority issue than:
1. FUD, Fear, Uncertainty & Doubt
2. Lack of profits (no profits=no taxes)
3. Health Care Costs
4. Other?
2011 will most likely not be like 1993. We do not have a PC and internet boom. The subchapter S corporations will now be forced to pay medicare taxes on all earnings, not just the salary. There is fierce competition for white collar work that did not exist in 1993. We have many new layers of requlations that artificially increase employment and production costs in 2011. We have a depressed environment for IPOs and venture capital funding in 2011 compared to 1993. We have a war on private enterprise in 2011 that did not exist in 1993.
Absolutely false, as many of you are about to discover. Even moderate inflation has quietly pushed many middle income people into higher brackets during the past 10 years. When rates and exemption levels revert in January 2011 to what they were in 2001 they will have a profound effect on Federal tax liability for many people who have never considered themselves wealthy. In addition, new taxes on high-earners (including many formerly job-creating small business owners) and on capital gains and interest income will cause many to shift investment to tax-free and tax-deferred accounts or to defer income-generating sales until some time in the future.
If you are a family with an income of approximately $75K-$150K, I urge you to calculate your potential liability NOW (on-line resources will help you) and plan to increase your Federal tax withholding beginning next year. You'll need it.
2010 Federal Income Tax Rates:
| Tax Bracket | Married Filing Jointly | Single |
|---|---|---|
| 10% Bracket | $0 – $16,750 | $0 – $8,375 |
| 15% Bracket | $16,750 – $68,000 | $8,375 – $34,000 |
| 25% Bracket | $68,000 – $137,300 | $34,000 – $82,400 |
| 28% Bracket | $137,300 – $209,250 | $82,400 – $171,850 |
| 33% Bracket | $209,250 – $373,650 | $171,850 – $373,650 |
| 35% Bracket | Over $373,650 | Over $373,650 |
Preliminary 2011 Federal Income Tax Rates:
| Tax Bracket | Married Filing Jointly | Single |
|---|---|---|
| 15% Bracket | $0 – $70,040 | $0 – $35,020 |
| 28% Bracket | $70,040 – $141,419 | $35,020 – $84,872 |
| 31% Bracket | $141,419 – $215,528 | $84,872 – $177,006 |
| 36% Bracket | $215,528 – $384,860 | $177,006 – $384,860 |
| 39.6% Bracket | Over $384,860 | Over $384,860 |
Kill the economy?? Does he mean the currently jobless recovery?
The economic conditions Clinton inherited were much better than now and 2009 and Clinton did not inherit or run up the massive debt we have now, the recovery was in progress when he raised taxes. And Clinton did not raise capital gains taxes on investments as will go into effect next year. The Clinton taxes were raising the upper income tax and the gasoline tax and some income taxes on social security. Then capital gains were cut when he had the Republican congress.
Right now we have a pretty grim situation even before the tax hikes. How about when investors sell their stocks later this year?
Laffer’s article explains it is the calendar-based change in behavior and not the taxes per se. He argues that we are in some quasi-recovery state now only because the wealthy are shifting economic activity into this year to avoid getting stung next year. Once we cross the line on Jan. 1 the stall will be palpable.
Very good.
Misery.
A very good, succint summary of Laffer’s Wall Street Journal article. Couldn’t have described it better myself.
If anyone deserves the Nobel Prize for Economics, it’s Art Laffer. Unfortunately, they’d rather award it to Paul Krugman.
Here’s something else -
it will be a lot less of a tax issue if grandpa dies on December 31, 2010 at 11:59 pm than if he dies on Jan 1, 2011 at 12:01 am.
Perverse incentives anyone?
And the kicker, of course, is that an 11% flat income tax rate would raise the same revenue as all those brackets. All we have to do is eliminate all deductions, exemptions and credits. So all the obfuscation and punishing of achievement could be avoided if people weren’t convinced they were “protecting” the poor from having to pay 11% of their income in return for the government services they receive.
That 11% figure is Art Laffer’s from an appearance on Glen Beck a month ago. That figure included completely eliminating Corporate Income Tax, as well, which would be a huge boon for employment — and it would incidentally remove the double taxation of dividends and encourage investment.
The economy grew at a 4.3% annual rate in the last quarter of 1992, the same pace as 1992 as a whole. Then in the first half of 1993 the economy grew at only a 1.7% annual rate.
But once this was past, the economy accelerated. Real GDP grew 3.7% at an annual rate in the second half of 1993 and then 4.2% for the full year of 1994. No recession.
Gee, you don't suppose some of that growth had to do with the explosion of the internet, do you?
Sorry, there was virtually no lead time on Clinton’s tax hikes-—he didn’t even take office until 1993. The repeal of the Bush tax cuts, coupled with a buildup of various hidden and sundry Obama tax hikes has been much longer coming—and therefore sooner impacting.
“Gee, you don’t suppose some of that growth had to do with the explosion of the internet, do you?”
Yep, it sure was luck Clinton had AlGore to invent it, eh ? /sarc
“* Spending was restrained by Congress to such an extent that we actually had a BUDGET SURPLUS by the end of last century.”
I thought that was smoke & mirrors. That there was a “projected” surplus based on tax revenues continuing on the same internet boom trajectory, but those revenues evaporated by late 2000 when the dot-boom went dot-bomb.
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