Out of Control Policy Blog

Expiring Bush Tax Cuts and the 2010 Fauxcovery

The President's economic team claim we are in the midst of a recovery. Geithner says he doesn't see a double dip recession in our future. But the unfortunate reality is that the "recovery" is really a fauxcovery. Housing is still in shambles. Debt weighs heavily on banks. And unemployment is being exacerbated by the limited credit in the system today. As long as we stay on this same track, our future economic outlook isn't looking to improve much.

The 2010 fauxcovery is going to be further fed by a rush of income focused on 2010 while the Bush tax cuts remain in place. But when they climb again in 2011, the economy is going to take a hit. Pete du Pont explains in today's WSJ:

as 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.

Read the whole Du Pont piece here.

Anthony Randazzo is Director of Economic Research


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