Arthur Laffer revolutionized the world with his economic theory
A very strong case could be made that the most influential economist in the world in recent decades has been Arthur Laffer. Ever since the 1970s, Laffer has been at the tip of the spear of the global tax reduction frenzy. He has influenced the economic thinking of great leaders ranging from Ronald Reagan and Margaret Thatcher to Jerry Brown and Donald Trump.
The highest income tax rates in nations around the world from Australia and Britain to France and Russia to Sweden and, of course, the United States have fallen from an average of 65 percent to about 40 percent since Laffer had burst onto the policy scene with his ideas in the 1970s. It is no coincidence that growth surged when these tax rates fell. From 1982 to 2007, the global economy grew at one of its fastest rates in history.
In a perfect world, Laffer would win a Nobel Prize in economics but, given the liberal bias of that award committee, it probably will not happen. The good news is that, on Wednesday, President Trump will award Laffer the prestigious Presidential Medal of Freedom for his tax cutting crusades.
The Laffer revolution began around 45 years ago when this young and precocious economist famously drew a graph in the shape of a turtle shell, pointing out the surprising relationship between tax rates and tax revenues, on a cloth napkin at a private dinner in Washington in 1974. That dinner was attended by Donald Rumsfeld and Dick Cheney, two top White House advisers to President Ford at the time, along with Wall Street Journal writer Jude Wanniski, who over the next few months and years excitedly editorialized about this profound new economic doctrine.
The idea illustrated by Laffer was disarmingly simple. There are two tax rates that produce no government revenues. These are 0 percent and 100 percent. No one works or invests if they have to fork over every penny to the government. In some instances, as when President Kennedy slashed income tax rates from 90 percent to 70 percent, the lower rates cause the economy to accelerate so much that income taxes paid can actually rise.
The left obsesses about whether tax cuts “pay for themselves” and the answer is sometimes yes but more often no. This is a sideshow to the key insight of the real paradigm shift led by Laffer, who refocused economics back to the role of incentives. When politicians cut the tax or regulatory burden on working, investing, or starting businesses, people respond by working, investing, and starting businesses more. This is called supply side economics because the supply of our goods and services is shifted upward. As Laffer has stated a thousand times, “When you tax something, you get less of it, and when you tax something less, you get more of it.”
President Reagan and Jack Kemp took to the idea. The famous 1981 tax cuts were a product of Laffer economic theory. By the end of the Reagan administration, tax rates were slashed from 70 percent to 28 percent. The economic comeback in the United States from the “stagflationary” 1970s was undeniable, with the surge in output contributing to unemployment, inflation rates falling by half, and economic growth surging to 6 percent and averaging just under 4 percent annually from 1982 to 1989. This was just like adding another California to the economy of the United States.
Laffer became the Pied Piper of lower tax rates around the world. Rates of 60 percent, 70 percent, and even 90 percent were falling and often cut in half. Ireland went down to less than 13 percent on its corporate tax rate, and businesses started to pour in. Sweden even abolished its estate tax.
The most recent disciple of the Laffer curve is Trump. Having worked on a tax plan for Trump, I can attest that Laffer was the most persistent and persuasive voice for cutting the corporate tax rate to 21 percent. While the final verdict of how well this all works remains unknown, the boost in growth and wages in our country, along with the record seven million unfilled jobs, has vindicated the true power of the Laffer model.
Amazingly, the Laffer curve notion that lower tax rates and fewer tax loopholes produce a more efficient way to collect taxes had become so mainstream and bipartisan that a tax bill that chopped the highest tax rate from 50 percent to 28 percent in 1986 was overwhelmingly passed in the Senate with 97 votes in favor, including the votes of Democrats like Al Gore, Bill Bradley, Joe Biden, Ted Kennedy, and Howard Metzenbaum.
Unfortunately, the political consensus that had emerged in the 1980s and 1990s that very high tax rates can cause severe economic damage has splintered. Today, the central message of the Laffer curve is sadly under assault from influential Democrats. Some of them in Congress, like Bernie Sanders, Elizabeth Warren, and Alexandria Ocasio Cortez, favor income tax rates on the rich of 50 percent, 60 percent, and even 70 percent.
This is all being promoted as a way to restore “fairness.” But if history is any judge, those tax rates will only slow the economy and hurt those at the bottom of the income ladder the most. Laffer shrugs when he hears talk of the sky high tax rates of the 1960s. “Some people just do not get it,” he laments. “70 percent of zero is still zero.” He adds, “A good tax system should try to make poor people rich, not rich people poor.”
Stephen Moore is a distinguished visiting fellow at the Heritage Foundation and an economic consultant with FreedomWorks. He served as an adviser to the 2016 Donald Trump campaign and has authored three books with Arthur Laffer, including “Trumponomics: Inside the America First Plan to Revive Our Economy.” You can follow him on Twitter @StephenMoore.