First-Quarter GDP is History; Beware a 2011 Slowdown

Certain fiscal and monetary tightenings recall 1937 moves that led to second leg of the Great Depression.

Randall W. Forsyth
Barrons.com
4/27/2010

AS ECONOMISTS MARK UP their estimates of the first quarter’s economic growth, the least relevant question for investors is what number the Commerce Department will publish Friday for gross domestic product. Three percent? Four percent?

Vastly more important is whether rebound of the last two quarters is sustainable, given certain contractionary changes in fiscal and monetary policy, perhaps starting late this year and certainly in 2011.

As the tax law currently stands, the Bush tax cuts are due to expire (or “sunset” in the semi-literate usage of Washington bureaucrats who never saw a noun they didn’t want to use as a verb) at the end of the year.

That would mean all joint filers with incomes over $67,900 would see tax hikes, with the top bracket returning to 39.6%. [Emphasis CAJ] The investor-friendly 15% top rate on dividends and capital gains also will end; dividends will revert to being taxed at ordinary-income rates while cap gains levies return to 20% under current law.

The Obama administration proposes limiting the increases on earned income to the two top brackets, taxing dividends and cap gains at 20%, while proposing limiting deductions, such as for mortgage interest and charitable deductions, for those in the highest brackets. These all would require Congressional approval, however, which is by no means certain.

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