Tax hikes to drive a second collapse?

Congress left Washington without addressing the massive tax hikes that will come at the end of the year as the tax-rate reductions of 2001 and 2003 expire.  Absent action on Capitol Hill, those increases will take $4 trillion out of the economy over the next ten years — and even if the lower tax bracket reductions get extended, $700 billion of capital will get redirected from the private sector to Washington.  How will that impact economic growth in the US?  Peter Ferrara argues that it will create not just a double-dip recession, but a second economic collapse — one worse than what we experienced in 2008.

In his new treatise published by Encounter for its Broadsides collection, Broadside No. 17: President Obama’s Tax Piracy, Ferrara notes that Barack Obama has chosen the opposite strategy in economic policy from both John Kennedy and Ronald Reagan, especially the latter.  Reagan cut taxes, especially on capital gains and dividends, and broke down regulatory hurdles.  Obama wants not only to raise taxes on those who have the most capital, he wants to make it harder for them to use it as well, quoting a similar analysis by Arthur Laffer:

[W]hen the U.S. economy comes to 2011, the train’s going to come off the tracks. . . . The tax boundary that will occur on January 1 , 2011 tells me that GDP growth in 2010 will be some 6 percent to 8 percent higher than GDP growth in 2011 . A year on year decline from trend of some 6 percent to 8 percent in 2011 growth would represent a larger collapse than occurred in 2008 and early 2009 .

Ferrara includes this helpful and rather cheerless chart to emphasize what Laffer predicts as we hit the “tax boundary”:

On top of that, and in large part because of it, the government won’t see the revenues it expects, either:

President Obama’s budget projects that his tax increases on “the rich” (singles making more than $200,000 and couples making more than $250,000) would raise $678 billion in increased revenue during the next 10 years.  The ObamaCare legislation projected another $210 billion from the increased payroll taxes on those workers for a total of nearly $1 trillion.  But these tax increases won’t raise anywhere near the revenue projected. Obama will be lucky if this tax piracy doesn’t result in less revenue. …

The projections of higher revenues from the other tax rate increases all fail to take into account the negative incentive effects discussed above and the counterproductive interactions from all those effects. Since we know from experience that those incentive effects are powerful and real, the result at a minimum will be less revenue than expected, if not less revenue overall.

This is the problem of static analysis on tax policy.  It assumes that the changes in tax policy sets up no other incentives or changes any behavior.  Of course it does, though, as do even threatened changes.  Ferrara believes that the economy may actually look better than it is this year because capital holders are moving gains and income into 2010 to avoid higher taxes next year.  After we hit the tax boundary, all the incentives go the other direction, and that means negative growth across the board.

President Obama’s Tax Piracy gives a worst-case scenario to be sure, but even a milder version of the predicted reaction would be ugly indeed.  Ferrara backs up his argument with plenty of data and analysis for a 49-page treatise, the format of the impressive Broadside series.  He reviews the results of policy changes in tax law and regulatory expansion and retraction over the past 50 years and draws clear policy implications from all.  We have been down both roads before, and often enough to have a map to the destinations of each.

Ferrara’s book will be released in the next couple of weeks, but do yourself a favor and pre-order a copy.  The price makes it affordable to almost everyone, and also will be released in Kindle format, which I highly recommend.