RUSH: Now, I have been promising all week — well, since Tuesday — to share with you a column Art Laffer wrote, published June 7th in the Wall Street Journal. And I want to start this hour with the column because if there’s one thing that you want to bone up on as the future is prepared to unfold before your very eyes it would be the information here in Art Laffer’s piece. The headline is: ‘Tax Hikes and the 2011 Economic Collapse — Today’s corporate profits reflect an income shift into 2010. These profits will tumble next year, preceded most likely by the stock market. 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.
‘Likewise, who is gobsmacked when they are told that the two wealthiest Americans — Bill Gates and Warren Buffett — hold the bulk of their wealth in the nontaxed form of unrealized capital gains?’ Let me repeat this. ‘Who is gobsmacked when they are told that the two wealthiest Americans — Bill Gates and Warren Buffett — hold the bulk of their wealth in the nontaxed form of unrealized capital gains? The composition of wealth also responds to incentives. And it’s also simple enough for most people to understand that if the government taxes people who work and pays people not to work, fewer people will work. Incentives matter.’ Let me intercede here and simply use myself as an example. I pulled the plug and left New York in 1997. I moved out of there because I discovered that there’s no state income tax in Florida. Have you ever wondered why so many athletes claim Florida as their residence, when they may live and work all over the country plying their trade? It’s because there’s no income tax here, there’s no income tax in Florida. People say, ‘Yeah, but they really nail you on the property tax.’ Well, they do, the property tax is higher here, but I’ve run the numbers and the no income tax combined with the property tax doesn’t even get close to what I was paying in income tax, state and city and unincorporated business tax, in New York.
I left New York in 1997 and I have been audited every year since I left. I have to prove where I am 14 different ways every day of each year. And I still get audited, and they still accuse me of lying to them about where I am on every day. I have not done this program in New York in a year and a half. Mr. Laffer is exactly right. And, folks, in this case, should I tell ’em what my tax rate per day is when I work in — I don’t think I should do that. It’s not the money; it’s the principle of the thing. Well, it’s ridiculously high, but that’s not the point. It’s the principle. If New York wants to drive people out of the state, I will lead the way. That’s the way I’ve looked at it since 1997. The point is here is that Laffer is exactly right, and his point about Gates and Buffett is the bulk of their wealth is in the non-taxed form of unrealized capital gains. They’re not paying taxes on their wealth, contrary to what they and everybody else want you to believe. And now Gates and Buffett met in some diner in Omaha recently and came up with a plan. They want every billionaire to give away half of his or her wealth, either now or at their death, give it away to charity.
Now, I don’t care what anybody does with their money. Gates and Buffett can do whatever they want with their money, but I draw the line at them telling everybody else what they should do with theirs. If they have a lot guilt over having amassed multiple billions of dollars, fine, then do with it whatever they want. But don’t take that guilt and try to spread it to everybody else, because once you start saying that billionaires ought to give away half of their wealth, well, then maybe everybody ought to give away half of their wealth up to, what is the magic number, $250,000 a year. You live your life the way you want to but leave me out of it. That goes for money, it goes for what I use to brush my teeth, to what kind of car I drive, to what kind of television set I buy, to whether or not I’m going to smoke a cigar or not, whether you’re around or not.
So the point is that Laffer incentives work. I’m going to tell you something else. With these massive tax increases coming starting in 2011, that’s why I told you yesterday the airline industry reported a two and a half billion-dollar profit this year, because they want to pay low tax rates on that profit this year, not next year. I don’t care how they got the profit, I don’t care if they got it charging for carry-ons or for bags or what have you. And there are a lot of corporations and industries that are gonna go ahead and report profit this year in order to pay tax on it this year, rather than defer it. People who have the ability are going to move as much of their income to 2010 as they can. Michael Eisner, 1992 in December, or maybe it was ’93, the month before the Clinton retroactive tax increase went into effect that took the rate to 39%, Eisner sold $192 million worth of Disney stock — and he had voted for Clinton, of course — to escape the new tax increase. And there are going to be a lot of people, people who have the ability to shift income, to take it earlier, whatever, they’re going to do that to avoid these new tax increases.
The point is the tax increases that are coming are not going to raise the revenue everybody thinks. People are going to be running away from this as fast as they can. All these profits are going to be reported and there’s going to be an economic downturn as a result next year. ‘People can also change the timing of when they earn and receive their income in response to government policies. According to a 2004 U.S. Treasury report, ‘high income taxpayers accelerated the receipt of wages and year-end bonuses from 1993 to 1992 — over $15 billion — in order to avoid the effects of the anticipated increase in the top rate from 31% to 39.6%,’ under Bill Clinton. So Eisner’s $192 million was part of that $15 billion. ‘At the end of 1993, taxpayers shifted wages and bonuses yet again to avoid the increase in Medicare taxes that went into effect beginning 1994.’ And to give you a real life example of how this works, our old friend the Breck Girl, John Edwards, who was always running around talking about the poor and poverty and there’s two Americas, John Edwards organized his business under subchapter S rules. So he went sub-S.
Now, the Medicare tax at the time was 1.9% of everything, not like the Social Security tax which has a ceiling. I think the Medicare tax is now 3% of everything. If you go sub-S, which is legal, don’t misunderstand, if you organize under subchapter S, let’s say your entire generated income in a year is, pick a number, 500 grand. You can pay yourself a salary of $75,000, or $100,000 and pay Medicare and Social Security only on that and income tax and then take the other in bonus, which is exempt from the Medicare tax, it’s salaries and wages and Edwards did that. And everybody said, ‘How can you do that?’ ‘Well, I’m just taking advantage of the law.’ ‘But I thought you wanted the poor people to get paid, I thought you wanted Medicare patients to get treatment.’ ‘I do, but I don’t want to pay for it.’ 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. 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 to 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%…’ More than doubles. ‘…the capital gains tax rate to 20% from 15%.’ Oh, that’s another thing. You’re going to have a lot of people — normally, you know, high-wealth people will take appreciated stock and they will donate that to charity, rather than sell it and pay the capital gains tax. But a lot of people have been going ahead and selling stock and buying others and the capital gains at 15%, so it’s going to go to 20. So what’s going to happen, you’re going to have a lot of people who will sell stock, they will liquidate their positions in which they’re holding a gain, prior to the end of the year in order to pay a lower capital gains rate of what Obama’s new rate is starting January 1.
All of this accelerated economic activity is gonna make the end of the year look like boom time. But at the same time, when January rolls around and the first quarter and the second quarter hit, then, of course, there’s no economic activity because these tax increases are in full force. And people are going to be less interested in even reporting income, they’re going to be looking for ways to shelter it or hide it so as to avoid paying these higher rates, the people that can, and the people that can are the people that hire you. So you have the capital gains rate’s going to go to 20% from 15, the estate tax right now is zero, it’s going to go back up to 55%. So a lot of people are probably going to die this year, they’re gonna move their death forward so that their families don’t have to pay any estate tax as opposed to next year when they would die, have to pay 55%.
‘Lots and lots of other changes will also occur as a result of the sunset provision in the Bush tax cuts. Tax rates have been and will be raised on income earned from off-shore investments. Payroll taxes are already scheduled to rise in 2013 and the Alternative Minimum Tax (AMT) will be digging deeper and deeper into middle-income taxpayers. And there’s always the celebrated tax increase on Cadillac health care plans. State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere. 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. Also, the prospect of rising prices, higher interest rates and more regulations next year will further entice demand and supply to be shifted from 2011 into 2010. In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has,’ which ain’t very strong, by the way. ‘When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe ‘double dip’ recession.
‘In 1981, Ronald Reagan — with bipartisan support — began the first phase in a series of tax cuts passed under the Economic Recovery Tax Act (ERTA), whereby the bulk of the tax cuts didn’t take effect until Jan. 1, 1983. Reagan’s delayed tax cuts were the mirror image of President Barack Obama’s delayed tax rate increases. For 1981 and 1982 people deferred so much economic activity that real GDP was basically flat,’ it contributed to that recession because people didn’t want to pay those high tax rates, they wanted to wait around ’til ’83 to report any income. ‘The unemployment rate rose to well over 10%. But at the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984. It has always amazed me how tax cuts don’t work until they take effect. Mr. Obama’s experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011. Consider corporate profits as a share of GDP. Today, corporate profits as a share of GDP are way too high given the state of the U.S. economy. These high profits reflect the shift in income into 2010 from 2011. These profits will tumble in 2011, preceded most likely by the stock market.’
Folks, this next is key. Listen to me. Look at me. ‘In 2010, without any prepayment penalties, people can cash in their Individual Retirement Accounts (IRAs), Keogh deferred income accounts and 401(k) deferred income accounts,’ without prepayment penalties. ‘After paying their taxes, these deferred income accounts can be rolled into Roth IRAs that provide after-tax income to their owners into the future. Given what’s going to happen to tax rates, this conversion seems like a no-brainer.’ Anybody who has a decent accountant is going to be advised to do this. It’s further economic activity taken outta next year and put into this year. ‘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.’