2011 Taxes

The next thing to worry about is the 2011 tax increases that are coming. I have to think this can't help but influence the thought process of entrepreneurs out there. Income taxes, dividend taxes, capital gains taxes, partnership taxes, and estate taxes are all scheduled to go up at the beginning of 2011.

You don't think there is a whole army of 60 year old guys running small businesses that figure that's a good reason to hang it up? I do. And they control a big part of the economy and GDP growth (99% of all businesses and employers of more than half of the total workforce). I suspect that discretionary deals and business from 2011 are going to be rushed into this year's business at the expense of next's. It's cash for clunkers for small business leaders! Pull next year's business into this year and worry about next year later. Or never.

For the opposite effect, we can look at the way Reagan's tax cuts affected GDP when he slashed tax rates across the board. Here is a chart of year over year changes in real GDP starting in 1980.


Anyone care to guess what quarter they took effect? You nailed it - QI83.

People will argue that inflation was finally being tamed (the chart is real GDP though) and we were coming out of recession, etc. And they would be right. But I don't think there is any way to argue that this doesn't at least tell the story that taxes matter and that they influence behavior. And that means a certain number of business owners are about to decide that dealing with employees, the economy, and the maze of other problems is just not worth it in the face of reduced income in 2011. It's just a matter of how many.

I think the phrase I'm looking for is double dip.

6/11/10 edit: here's Arthur Laffer's video on the subject.