Famed Economist Arthur Laffer states that he sees economic collapse coming to us in 2011. A number of last year's tax deductions have disappeared due to the failure of Congress to extend them into this year. The tax deduction for state and local sales taxes is one; the deduction for college tuition and fees is another; and the 50% write-off for small businesses for capital purchases--equipment, machinery or building a new plant--has disappeared as well, which will have a negative effect upon the construction of new business operation facilities. Add on to all of these increases the biggest government deficits and spending increases (to 26.5% of gross domestic product from 21%) in half a century, the protectionism of free trade downsizing through the "buy American" requirements, China import restrictions, and the administration limitations of Columbia, South Korea, and Panama free trade agreements, and we have a very different, and not very prosperous, America ahead of us. Economist Arthur Laffer wrote in his January Economic Outlook, we "cannot have a prosperous economy when government is overspending, raising tax rates, printing too much money, over-regulating and restricting the free flow of goods and services across national boundaries." We are, in his words, simply "moving in the wrong direction." But what Mr. Laffer sees as most important is a substantial American economic collapse coming to us in 2011. His reasoning is simple and sensible: the impending 2011 tax increases will lead Americans to get their incomes into this year and pay the current lower tax rates. That will mean a 2010 GDP growth 3% to 4% higher than it otherwise would have been, and that will look very good. But when the huge tax-increase agenda arrives a year from now, the economy will begin to decline, and will be some 3% to 4% smaller than it otherwise would have been. The artificially high growth in 2010 followed by artificially low growth in 2011 would "represent a larger collapse than occurred in 2008 and early 2009," Mr. Laffer writes. He also points out that there is a four- to eight-month gap between market performance and economic performance. Indeed, the market has often reflected good or bad tax news four to eight months ahead of their impact on the economy. We historically saw that after the Harding tax cuts (1922), the Smoot-Hawley tariff bill (1929), the Kennedy tax cuts (1963) and the Reagan tax cuts of 1983. If this pattern repeats, we could see the market begin to deteriorate sometime in the summer or fall of this year. In modern times the Kennedy, Reagan and George W. Bush tax rate reductions helped spur economic growth. The Obama tax rate increases will have the opposite effect. Americans headed to the polls this fall, worried about the increasing size and spending of the federal government, possibly a falling market, and next year's looming tax increases, may reproduce next November the voter revolt we saw in the 1994 congressional elections.
