Confronting Imminent Collapse, Part II
I consider Arthur Laffer a reasonable man. The guy relies on the beauty of mathematical logic rather than rely on second-hand news/opinion accounts like those who are mathematically illiterate are forced to do. His economic/tax theory, illustrated by the parabolic Laffer Curve, has been proven time and time again. For those who hate numbers, all he illustrates is that if the government starts at collecting zero taxes and then increases tax rates, generally incoming tax revenue increases. By default, that also means that all our individual outgoing tax expenses increase.
However, if government keeps increasing tax rates, that does NOT mean they will necessarily collect more taxes as a result. The Laffer Curve shows that the people who pay the taxes hit a breaking point as tax rates increase. Meaning, the more your goods cost more as a result of higher rates, the less goods you’ll buy, which means the less taxes are being collected. It makes sense that if we get penalized more and more for purchasing products, then we’ll just slow down or stop buying the products.
It’s the same reason some people in certain situations are reluctant to get raises at work – they know that the raise will trigger a higher tax bracket, and so they will take home less money as a result. Thanks a lot, progressive income tax system, and those who support it by keeping quiet and accepting business as usual.
So when the Bush tax cuts expire starting 2011, that means income taxes will go up, dividend taxes will go up, the capital gains tax will go up, and the estate tax (which is a fancy term for DEATH TAX) will be awakened from the dead. We die, and taxes will live.
Businesses with any financial foresight know this. Therefore, they are looking to produce as much as they can in 2010 to take advantage of the lower tax rate, so they can hoard when the higher tax rate goes into effect, which will minimize their penalties for producing. Which leads me to this thought – why are there penalties for producing anyway?
This phenomenon, called an “income shift”, will make 2010 look better than it should, but also makes 2011 and later much worse than it should. Just as the Cash For Flunkers program seemed successful at the time, only to find out the real result was that sales were stolen from the future. Someone who would have bought a car in September ended up buying them in July when the program was in effect. One more car sold in July means one less car sold in September. Instead of an even flow that is forecastable, the sales were distorted in favor of the timeline that the program was in effect.
Of course, Obama and the Congress could stick some provision in on a bill that would cancel the deadline, and let the current tax rates stand as they are, but they seem too busy convincing us that this isn’t a tax increase, it’s just an expiration of temporary tax discounts. Ummm…sounds like an increase to me. However, it is possible that if this becomes more of a political hotspot issue that we may see something passed sometime in late December, just in time for all tax preparers to relearn tax law after their software has already been installed for 2010. Nothing new here, Nothing to see here, please move along.
The Great Recession is here to stay for awhile. Jobs are opening up somewhat, but I wonder if that well will dry after the New Year rolls around. It’s times like these where I wish Mr. Laffer were wrong for once. Only time will tell.