What happens when Tax Cuts Expire in 2011?

Tax rates will rise sharply. Businesses are already planning for it now, and it will affect the state of the economy and the recovery. But how much so? Here are two perspectives:

Tax Hikes and the 2011 Economic Collapse
Today's corporate profits reflect an income shift into 2010. These profits will tumble next year, preceded most likely by the stock market.

[...] 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.

Tax rates have been and will be raised on income earned from off-shore investments. 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.

Also, 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. In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has. 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 article goes on to compare what is happening now, with what Ronald Reagan did in 1981, to pull us out of a recession. The current Administration is doing exactly the opposite, and the results will be exactly the opposite too. Many in this Administration have been claiming that "capitalism is dead"; and now it seems they are doing their best to make sure it happens.


Tax cuts actually increase tax revenue, because as businesses prosper, there are more businesses and employees paying taxes. The Democrat leadership knows this too, but it doesn't fit with their agenda of attacking the private sector and expanding government power and control. Many of them would even like to overburden and collapse our current system of government and economics, so they can then replace it with something else. And unfortunately, the Democrat's understanding of economics in general, tends to be very poor. We are seeing the proof of that now.

Even so, I don't want to be strictly partisan about this, I want to be realistic. Is the prediction of "economic collapse" in 2011 too grim? Or at least, too soon? Perhaps.

Will Higher Tax Rates in 2011 Cause an Economic Collapse?

[...] I am reluctant to endorse Art’s prediction that the “economy will collapse,” since even good economists are lousy forecasters. But we certainly will see a large degree of tax planning, which will lead to less revenue than expected next year. And the higher tax rates will inhibit growth, though it is impossible to predict whether this means 2.1 percent growth instead of 2.3 percent growth, for instance, or 0.5 percent growth instead of 0.6 percent growth. [...]

You don't need to be a rocket scientist to understand that if taxes rise sharply, businesses will make decisions based on that, and the cost of higher taxes will be passed on to the consumer in the form of higher prices.

In our own business, we are buying new equipment and making repairs and improvements this year, because we are anticipating the costs of these things to rise next year. Therefore, we won't be spending much next year. I would have to assume that other business people who are paying attention to what is happening are going to do the same.

Even if we elect a better congress in November, it will take time to reverse the many bad trends that have already been put into motion. I don't see a quick fix for any of this. We are going to have muddle through. If that is the best we can do, then we must do it. The situation is what it is, but it can be improved, even if it has to get worse for a time, before it can get better.


Also see:

Has US Currency already "collapsed"?

What would a U.S. currency collapse look like?

     

What can the Swiss teach us?

Plenty, apparently:

Learning from what works
Low taxes and financial privacy laws should be emulated

[...] In many ways, Switzerland seems unlikely to be such a long-term global success story. It is a small country with religious and language differences; nevertheless, the Swiss have managed to live peaceably together for a long time. It has few natural resources, yet it has managed to have one of the highest per capita incomes in the world. It has a world-class health care system, which is privately run. Health care insurance is subsidized, and everyone has access regardless of income, but there is no "public option."

Switzerland is not perfect, but it is clean, prosperous, well-managed, pleasant, humane and very free. In the more than three decades I have been coming to Switzerland, I have been convinced that the United States and the rest of the world can learn from many things the Swiss have done. The Swiss are practical rather than ideological, but they do revere liberty. They protect private property and free markets and restrain themselves from rampant deficit spending. The Swiss maintain a sound currency, which has been rising against the euro, dollar and pound. Capital, goods and services, with few exceptions, move freely into and out of the country.

Long ago, the Swiss understood that most things government needs to do and constructively does are at the local level. So, unlike in most modern nation-states, local government has the bulk of the resources and activities, while the central government remains relatively small and less important in the daily lives of the people. In the U.S., roughly two-thirds of government is at the federal level, and one third is at the state and local level. Switzerland is just the opposite, with roughly two-thirds of government being at the state (canton) and local level. Both the United States and Switzerland are federal republics. If one reads the Federalist Papers and the other works of the American Founding Fathers, it is clear they envisioned a nation that operates much more like Switzerland than one with the large central government the U.S. now has.

The maximum marginal tax rate at the federal level in Switzerland is about 11.5 percent, while in the U.S., it will be more than 40 percent as a result of Obamacare and the planned expiration of the George W. Bush tax-rate cuts at the end of this year. In Switzerland, maximum income tax rates in the cantons range from 10.9 percent in Zug to about 30 percent in places like Geneva. In the U.S., state and local income tax rates range from zero in places like Texas and Florida to roughly 12 percent in New York City and California. Thus, the overall maximum income tax rate in Switzerland ranges from roughly 20 percent to 40 percent, depending on location, while in the U.S., the maximum rate ranges from 40 percent to 51 percent.

Switzerland also does not impose a capital gains tax, and most cantons allow large deductions for interest and dividends. On the negative side, Switzerland imposes a value-added tax (VAT) and a very small wealth tax. On the positive side, the average combined federal-canton corporate tax rate is 21.3 percent (and may be as low as 11.8 percent in some places) while in the U.S., the average combined federal-state rate is more than 40 percent. [...]

There is a right way and a wrong way to tax people. The right way does not sink the ship. No country is perfect, but we can always learn from what works.


Also see: The Swiss, and their Guns

     

The French pay less taxes than we do?

What! Socialist France, less taxes? Take a look:

Is France Doing Better Than The U.S.?

Why does it appear France is bouncing back more quickly from the recession than the United States?

France has long been known for having an economy that suffered from too much government interference, too-high taxes and destructive union activity. Yet it grew 1.4 percent in the second quarter of 2009, while the U.S. economy continued to decline.

The United States and Britain have had the largest "stimulus" programs of the major economies (as measured by increases in government spending and deficits relative to gross domestic product) and yet they are not moving toward recovery as rapidly as most other countries that had far smaller stimulus programs or none.

[...]

... France has sharply reduced its corporate income-tax rate so it is lower than the U.S. rate. France also has been reducing its individual tax rates so that many Frenchmen now pay a lower maximum tax rate than do the taxpayers of New York, California and many other states.

If the tax-rate increases proposed by the Obama administration and the Democrat Congress are passed into law, all upper-income Americans will be paying higher personal tax rates than the wealthy in France.

[See the table in article for a tax and finances comparison]

However - the economic reforms in France have not been sufficient to keep large numbers of wealthy French from moving much of their savings and investment to other countries.

Rather than make their tax laws sufficiently competitive to keep their capital at home, the French have been on a crusade to force other countries to raise their tax rates and engage in widespread tax information sharing.

These bad habits have been picked up by many in the U.S. Congress as it pushes for legislation to discourage the free movement of capital along with the destruction of financial privacy. The result will be slower economic growth throughout the world, less job creation and more economic misery. [...]

As the French make changes in their own economy, perhaps we should emulate their successes, rather than their failures. The article goes on to say that other countries offer more attractive models, but that France is continuing to work on theirs to make it more workable and attractive, thanks to French think-tanks like the Institute for Economic Studies-Europe and other groups too.

There really is a lot be learned here from the French. Is our government paying attention? Or are they too busy maintaining and orchestrating a crisis, as an "opportunity" to further their agenda of expanded government control and interference in our lives?

The energy policies of France, and the protection they afforded France from the effects of the recession, are also worth noting.