Wednesday, September 22, 2010

9/22 12:55

I've had questions about why I think this decline will be severe.  I am expecting economic damage in 2011 and one of the reasons is taxes.  The following is a synopsis of this view from Arthur Laffer:

Federal tax rates are going up next year for income, capital gains, dividends, and estates, along with several other categories.  State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere.  Because the economic future is filled with taxes almost everywhere one looks, much of the capital and spending activity has been shifted from 2011 and is occurring this year, 2010. This is to avoid the coming squeeze. Laffer believes the evidence is strong that the slight rebound in the economy is solely due to the shift from 2011 to 2010. " ...the prospect of rising prices, higher interest rates and more regulations next year will further entice demand and supply to be shifted from 2011 into 2010."

Because of this reaction from the private sector in anticipation of draconian tax policies during and after 2011, Laffer believes that "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."

The fact that 2nd half 2010 is significantly slower than economists were dreaming, er. forecasting means that economic activity being supported here due to investment shift is much weaker than reported.


  1. The one caveat is this: Just because the economy sucks does not necessarily mean the stock market will also tank. Didn't the stock market stage some incredible rallies during the 30's when the country was dealing with 20+ percent unemployment? Stock market doesn't seem to care about the overall economy, just whether companies can be profitable.

  2. Investment drought will hit profits hard. The stock market leads by 6 months, so 1st quarter is being discounted now. The taxes start going up Jan 1.

  3. It's past 2pm, time to ramp stocks!

  4. Another caveat is that the Dems cave in on letting the tax cuts expire for all income groups. If the expiration is put off, the economy could continue to muddle along a while more.

  5. It's not just the Bush cuts, it's the regulations, health care, and new taxes coming onstream for business.

  6. State and local taxes are already going up to compensate for disastrous fiscal problems and lack of federal sharing with the end of stimulus. Fed funds are not targeting filling the holes in state and city budgets.