If history is any guide, tax hikes can be lethal to expansions. The last time both corporate and personal tax rates were raised, for example, was in 1968, and a recession followed. And the more recent tax increases of 1990 torpedoed an already foundering economy.
Economist Edward S. Hyman of investment consultants International Strategy & Investment Group Inc., argues that history won't repeat itself this time around, however. In the 1968-69 episode, he notes, the inflation rate was 5% and rising, bond yields were moving higher, and the federal funds rate hit 9%. And in late 1990, the economy was already weakening, fed funds and bond yields were both over 8%, the banking system was in trouble, and consumer prices were rising at a 6% clip.
By contrast, notes Hyman, business today is expanding, fed funds are at 3%, bond yields are at 25-year lows, banks are healthier, and inflation is around 3%. In sum, he says, "today's tax increases are occurring in a far more benign environment, and that means that they are much more likely to slow the economy than to push it into recession."