Tax hikes expected to hit after the expiration of the Bush tax cuts will cause today's corporate profits to tumble next year — probably right after a stock market collapse, says economist Arthur Laffer, chairman of Laffer Associates and inventor of the Laffer Curve.
“My best guess is that the train goes off the tracks and we get our worst nightmare of a severe 'double dip' recession,” Laffer says.
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Laffer warns of these coming tax hikes:
• the highest federal personal income tax rate will go to 39.6 percent from 35 percent;
• the highest federal dividend tax rate pops up to 39.6 percent from 15 percent;
• the capital gains tax rate will hit 20 percent from 15 percent;
• the estate tax rate soars to 55 percent from zero.
“Lots and lots of other changes will also occur as a result of the sunset provision in the Bush tax cuts,” he wrote in the Wall Street Journal. “Tax rate increases next year are everywhere.”
Laffer says the coming hikes — coupled with the prospect of rising prices, higher interest rates and more regulations next year — are causing businesses to shift production and income from 2011 to 2010 to the greatest 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,” Laffer says.
"It shouldn't surprise anyone that the nine states without an income tax are growing far faster and attracting more people than are the nine states with the highest income tax rates,” he says.
"Likewise, who is gobsmacked when they are told that the two wealthiest Americans — Bill Gates and Warren Buffett — hold the bulk of their wealth in the nontaxed form of unrealized capital gains?"
Laffer notes that, according to a 2004 U.S. Treasury report, high income taxpayers accelerated the receipt of wages and year-end bonuses from 1993 to 1992 — more than $15 billion — in order to avoid the effects of the anticipated increase in the top rate from 31 percent to 39.6 percent.
At the end of 1993, taxpayers shifted wages and bonuses yet again to avoid the increase in Medicare taxes that went into effect beginning 1994.
Reagan's delayed tax cuts, Laffer observes — which were passed under the Economic Recovery Tax Act in 1981 but didn’t take effect until 1983 — were the mirror image of President Barack Obama's delayed tax rate increases.
“For 1981 and 1982 people deferred so much economic activity that real GDP was basically flat (i.e., no growth), and the unemployment rate rose to well over 10 percent,” he points out.
However, in 1983, the economy took off like a rocket, with average real growth reaching 7.5 percent in 1983 and 5.5 percent in 1984. Mr. Obama's experience with deferred tax rate increases will be the reverse.
The economy will collapse in 2011.
In 2010, Laffer points out, people can cash in their Individual Retirement Accounts (IRAs), Keough deferred income accounts and 401(k) deferred income accounts without prepayment penalties.
After paying their taxes, these deferred income accounts can be rolled into Roth IRAs that provide after-tax income to their owners into the future.
The result will be a crash in tax receipts once the surge is past, Laffer says.
"Incentives matter," Laffer says. “If you thought deficits and unemployment have been bad lately, you ain't seen nothing yet,” adding that if the government taxes people who work and pays people not to work, the result will be that fewer people will work.
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According to a survey from the National Association for the Self-Employed, businesses will experience a 1,250 percent increase in the amount of tax-related paperwork required of small-business owners come 2012, making economic progress even more difficult.
"To the mom and pop shop, time is money, and this new regulation is going to require plenty of both," NASE Kristie Arslan told the Earth Times.
"The bottom line is that the Form 1099 expanded reporting requirement affects companies small and large, increasing the number of forms issued and received many times over."
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