Arthur Laffer discusses tax hikes and the 2011 economic collapse:
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.
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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.
Laffer’s always made sense to me. While I very much liked the tone/content of his latest WSJ op-ed piece, I remain confused by his closing recommendation, which was to dump 401k/Keough plans and shuttle monies (after paying taxes) into Roth IRA’s. The argument was, I think, that if tax rates go up, this is somehow more protective. Don’t 401k’s temporarily shelter from taxes as it is? In my ignorance of accounting/tax law, I don’t see the additional value of shifting to Roth, but would be happy to see a mini-tutorial from a savvy Isegorian on the topic.
Both the traditional IRA and the Roth IRA allow an investment to compound without annual taxation. The difference is that the traditional IRA is taxed at the end, at retirement age, at whatever tax rate is in effect then, while the Roth IRA is taxed up front, as ordinary income, at today’s (known) tax rate.