NCPA - National Center for Policy Analysis


June 7, 2010

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 percent from 35 percent, the highest federal dividend tax rate pops up to 39.6 percent from 15 percent, the capital gains tax rate to 20 percent from 15 percent, and the estate tax rate 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, says Arthur Laffer, chairman of Laffer Associates and co-author of "Return to Prosperity: How America Can Regain Its Economic Superpower Status." 

Tax rate increases next year are everywhere: 

  • 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.  

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.  

According to Laffer, 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, Laffer predicts that the train goes off the tracks and we get our worst nightmare of a severe "double dip" recession. 

Source: Arthur Laffer, "Tax Hikes and the 2011 Economic Collapse," Wall Street Journal, June 7, 2011. 

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