Recently there has been a lot of talk about how higher tax rates will bring about a "double-dip" recession in 2011 when the Bush tax cuts expire. Art Laffer's piece in Tuesday's Wall Street Journal was especially pessimistic about the future of our economy.
One of the points highlighted in the WSJ piece was the fact that the top marginal income tax rate would rise from 35% today to 39.6% next year. While this is not a good thing, it doesn't mean the economy will collapse. Next year's 39.6% rate is the same rate we had during the economic boom throughout the 1990s. And hiking the top marginal income tax rate from 31% in 1992 to 39.6% in 1993 didn't cause a recession or economic collapse. GDP did slow from 3.4% in 1992 to 2.9% 1993 as the tax hikes went into effect, but no one can call that slowdown a recession or collapse. In fact, growth accelerated to 4.1% in 1994. Remember, there is more than one moving part in the economy. Back in the early 1990s, the Fed was very easy, just as it is today. As a result, we feel that the tax hikes in 2011 will have a similar impact on the economy and growth.
While higher taxes are always a threat to the long-run path of growth, creativity, and entrepreneurship, the end of the Bush tax cuts don't mean a double-dip recession is in the cards. It's true the growth of government, higher taxes, more regulation and deficit spending cloud the economic outlook past 2011. But right now the Fed is extremely easy (just like it was in the early 1990s) and we believe the economy will continue to recover. In addition, the election of this November will have a major impact on policy direction as well.
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Posted on Friday, June 11, 2010 @ 2:27 PM
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