Paul L. Caron

Monday, June 7, 2010

Laffer: The Coming Tax Hikes Will Cause an Economic Collapse in 2011

Wall Street Journal op-ed, Tax Hikes and the 2011 Economic Collapse, by Arthur B. Laffer:

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

[I]f 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 result will be a crash in tax receipts once the surge is past. If you thought deficits and unemployment have been bad lately, you ain't seen nothing yet.

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I thought everyone was still laughing about the Laffer curve. I hear talk of a lost decade from economists as must as I hear about inflation.

Posted by: dfb | Jun 11, 2010 3:39:53 PM

For those few companies investing in job expansion, they are doing so in countries that do not impose tax on profits. These same companies will take advantage of NOL carryforwards domestically as profits (and jobs) are exported elsewhere during 2011.

If the intent is for innovation to help the economic recovery, the underlying incentives are not aligned.

Posted by: reb | Jun 9, 2010 11:15:35 AM

not laffing it up: I want to see the work showing these results. Where's the napkin?

It wouldn't do you any good.

Are You Smarter Than a Fifth Grader?
Self-identified liberals and Democrats do badly on questions of basic economics.


Who is better informed about the policy choices facing the country—liberals, conservatives or libertarians? According to a Zogby International survey that I write about in the May issue of Econ Journal Watch, the answer is unequivocal: The left flunks Econ 101.

...Mr. Klein is a professor of economics at George Mason University. This op-ed is based on an article published in the May 2010 issue of the journal he edits, Econ Journal Watch, a project sponsored by the American Institute for Economic Research. The article is at:

Posted by: Woody | Jun 8, 2010 7:09:29 PM

If the tax increases do not do it,
the interest rate increases will;
They will begin right after the
November elections.

Posted by: M.Report | Jun 8, 2010 1:08:12 PM

I want to see the work showing these results. Where's the napkin?

Posted by: not laffing it up | Jun 8, 2010 6:55:27 AM

The one quirk in the mix is that U.S. is part of a global system, and does not exist in a vacuum. As other global markets look even WORSE than the U.S., a great deal of frightened foreign investment is going to head our way lacking anywhere else better for it to go.

This will probably do nothing but mask the problems, and exacerbate them as politicians will think the impact of higher taxes was minimal. I'd say 2012 or 2013 will be a big "kablooey" for the U.S.

Posted by: Sean | Jun 7, 2010 11:04:41 PM

I'm reading the words "economic collapse" a lot lately.

Posted by: Arty | Jun 7, 2010 5:11:01 PM

Job creation is in the tank already with businesses doing a "capital strike", delaying or scrapping investment plans. Happens every time government spending goes nuts, a lot of new regulatory mandates appear and the solons of state look like idiots or liars (now they look like a toxic mix of both).

The tax hikes will not generate revenues anywhere near what they are expected to, which means the deficit will really catch fire. 2011 is not going to be a good year.

Posted by: Harry Schell | Jun 7, 2010 4:00:46 PM

If Professor Laffer's predictions hold true, then....

1. Obama won't even get renominated in 2012.

2. 2010 will be a rotten year for Democrats. 2012 may well see their collective annihilation.

In short, a double-dip recession of the type envisioned by Laffer could easily put the GOP into a position of political dominance that it hasn't had since the 1920's. Hope! Change!

Posted by: MarkJ | Jun 7, 2010 3:42:55 PM

You're exactly right about the current deal activity. My company is being sold now, and a big motivation for the timing was 15% instead of 25% capital gains tax.

Posted by: jeff | Jun 7, 2010 3:38:37 PM

this will happen unless the bush tax cuts are renewed. if the democrats suffer a sufficient disaster in the november election, there is a prospect that a republican congress and a chastened Obama could reverse most of this congress's spending, and renew those tax cuts with even more, and avoid this disaster.
otherwise this prediction seems safe.
of course a war in the middle east, as grows ever more imminent given the supine posture of our present government, could change everything in a random direction.

Posted by: daniel | Jun 7, 2010 3:19:03 PM

Unfortunately, an economic collapse would lead the average voter to conclude that more government is needed——exactly the opposite of what would rectify the situation.

Posted by: PacRim Jim | Jun 7, 2010 3:13:51 PM