Watch out, 2011 is coming

Economic trends to watch as 2011 approaches:

1. Death tax
The "Death Tax," which gradually dropped from 55% in 2001 down to 0% this year, is scheduled to jump back up to 55% in 2011 (summary from the Tax Foundation). How many people will "choose" to die this year to avoid the increase in the death tax?

Believe it or not, there is some evidence to support this possibility. See this University of Michigan study (from the university website and from a published journal).

And of course, the Left blames this on Republicans, completely ignoring the fact that this provision (making these cuts temporary) was necessary to pass the tax reductions at all:
http://www.newsweek.com/2009/08/28/death-republican-style.html

Anyway, not much to discuss here. You won't be surprised to know that I am in favor of repealing the Death Tax altogether. I'm genuinely curious to see if people's behavior (if more people die sooner) is significantly affected by this.


2. Tax increases
More importantly, the George Bush tax cuts (2001 and 2003) are expiring at the end of this year. This means that we will see an effective tax increase on January 1, 2011. How will this affect the economy? Or is it already affecting the economy?

The Heritage Foundation summarizes it well: "Because of opposition to these measures from some in Congress, they were implemented as temporary tax cuts, all of which will expire by January 1, 2011. The uncertainty of their future has an effect on present-day spending by businesses and individuals, who know that they may have to pay higher taxes in the future." It is possible that companies are pulling profits into 2010, at the expense of 2011 earnings. This means that the "recovery" we are now seeing may be completely artificial.

Economist Arthur Laffer has written an alarming article about this:
Tax Hikes and the 2011 Economic Collapse
http://online.wsj.com/article/SB10001424052748704113504575264513748386610.html

Some key quotes:

"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."

"...if the government taxes people who work and pays people not to work, fewer people will work. Incentives matter."

"Just remember what happened to auto sales when the cash for clunkers program ended. Or how about new housing sales when the $8,000 tax credit ended? It isn't rocket surgery, as the Ivy League professor said."

"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."

"The economy will collapse in 2011. ... 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."


Remember, our friends on the Left do not understand economics. They probably still think that as the "recovery" continues, combined with the increase in tax rates, they will be rolling in dough. They think that they can keep spending recklessly. Not so. Tax revenues will plummet and we will be in even bigger trouble than we are now. I hope this projection is not true, but I fear that it is.