Tags: Laffer | US | economy | Collapse

Former Reagan Adviser Laffer: US Facing 'Economic Collapse'

Monday, 16 Jul 2012 11:00 AM

The U.S. economy is facing "an economic collapse" because of massive tax increases scheduled for Jan. 1 and continued deficit spending for years on end, according to former Reagan adviser Arthur Laffer, president of Laffer Associates, and Ford Scudder, the firm’s chief operating officer.

“Keynesians worry about spending cuts and to some extent the expiration of the temporary 2 percent payroll tax cut,” Laffer and Scudder wrote in The Wall Street Journal. “But the looming expiration of the Bush tax rate cuts, along with new levies enacted as part of Obamacare, pose the greatest threat.

“The breadth of what will hit the country is extraordinary,” they added.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

On a static-revenue basis, Laffer and Scudder noted, federal tax increases total nearly $500 billion (more than 3 percent of gross domestic product) per year, not including the $1 trillion, 10-year increase in excess spending over tax receipts in the healthcare reform legislation.

“Given that many of the new taxes are rate increases at the margin, they will affect incentives to earn additional income,” they wrote. “Thus it is a certainty that we face a lower level of output in 2013.”

When the government is overspending, printing too much money and increasing taxes, the economy cannot prosper, they said.

Laffer and Scudder pointed out that Ronald Reagan's tax cuts in the 1980s and Bill Clinton's spending cuts (as a percentage of GDP) and his cut in the capital gains tax rate in the 1990s propelled the economy to grow rapidly.

“We're looking at the mirror image of that in years ahead — a situation in which the economy deteriorates more than it might otherwise,” they wrote.

Even if Congress acts and the 2013 tax increases do not take effect, they noted, “a good portion of the income shifting is already set in stone.”

“America is going to get socked by a triple whammy on output, employment and income,” they wrote in The Journal. “No matter what happens from now on, 2013 will be a very tough year.”

Lawmakers appear to be deadlocked regarding how to deal with the so-called “fiscal cliff,” according to Reuters.

President Barack Obama has called for a one-year extension of the Bush-era tax cuts for those making less than $250,000. But Republicans want to extend the cuts permanently for those making more than that amount.

Larry Summers, former U.S. Treasury Secretary, told CNBC that the Bush-era tax cuts should not be extended for the wealthiest Americans because it will perpetuate income inequality.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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