More and more economists talk about a “V”-shaped recovery. The recession has been so bad, their theory goes, that there is now pent-up demand for goods and services. New data from the government show that Americans have been saving more than was previously thought. The rate at which unemployment is growing has slowed and may level out before the end of the year.
Some economists now expect the current quarter to show 3% GDP growth and the fourth quarter to be nearly as good. Forecasts for 2010 have been revised upward by a number of experts in the last month. Some members of the FOMC believe GDP growth next year could approach 4%.
Pessimists expect GDP growth will only range in the 1% to 2% range for the next two years. They base this on rising unemployment, falling home prices, and a consumer population that still has too much debt. This school of thought, if right, almost certainly means that government deficits will rise more quickly than the Administration believes because IRS receipts from business and personal taxpayers will be below the government’s plan.
The better case for the economy, the case in which GDP rises rapidly next year, could be significantly aided by the increases in the taxes levied on individuals and enterprises starting in 2011. It appears that the taxes on capital gains and dividends will rise in 2011. The top marginal income tax rate will move as high as 39.6%. The exemption for estate taxes could also change. Taxes on carbon emissions and health care benefits are among only a few of the new costs that American businesses may face.
The natural reaction of all those anticipating higher taxes in a future year is to bring forward as much taxable income as possible. Income and business transactions that would be taxed in 2011 will be put into 2010 to that extent that any intelligent individual or business enterprise can do so. A “V”-shaped recovery which would cause a 4% GDP increase in 2010 could turn into a 6% rebound as taxes get hedged
Next year could end up being better for the economy that even most optimists would suppose, but, that is bound to be due to an artificial shift in events that cause taxable income. That will make 2011 into a year when even modest growth will be difficult. On top of that, taxes will be set to rise sharply. One case for a “double dip” recession is based on unemployment going toward 11% in 2011 and the consequent rapid fall in consumer spending which would cause the economy to contract again.
The more powerful case for a second recession is that 2010 GDP will do well because all entities that are taxed will make the intelligent move of legally cheating the government as much as they can by increasing their economic activity next year and lowering it in 2011. GDP will be hit by a migration of productivity into next year. The damage done to 2011 will be made worse by taxes taking even more capital out of what could be a weakened economy.
The federal government’s tax plan for 2011 is almost certain to leverage GDP improvement up next year and leave future problems to the far-sighted.
Douglas A. McIntyre
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