Laffer On Taxes And The Coming Revenue Crunch

Economist Arthur Laffer (he of the Laffer Curve) gives us a reminder and a preview of how tax policies can affect economic activity, sometimes for the better, but this time around for the worst.

People can change the volume, the location and the composition of their income, and they can do so in response to changes in government policies.

It shouldn't surprise anyone that the nine states without an income tax are growing far faster and attracting more people than are the nine states with the highest income tax rates. People and businesses change the location of income based on incentives.

People can also change the timing of when they earn and receive their income in response to government policies.

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.

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.

Anyone believing people and businesses won't change their schedules or behavior due to tax increases or decreases or government mandates are either deluded or have no understanding of human nature or business. The upcoming tax changes will certainly affect the revenues collected next year as anyone capable of taking advantage of the existing tax rates will do so before the rates change next year. To do otherwise would be foolish. (I am also assuming that many of the same people who deride others for taking advantage of moving up income or other disbursements will do likewise, showing that they are hypocrites as well.)

Probably the biggest problem facing us is that, as a group, far too many liberals have a very poor understanding of economics. How do I know? Because Zogby tells me so.

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.

Some commenting on the Zogby piece claimed the questions asked didn't include enough specifics, but the poll was supposed to cover generalities, not definitive economic principles. Zogby wasn't polling economists, but members of the general public, giving us a decent snapshot of economic knowledge and attitudes across America, including some of our politicians. And with a majority in Congress, the left has been making some major economic blunders in their ignorance.

Need we say more?