Art Laffer’s Toxic Prescription

Art LefferJon Perr wrote a great article at his website Perrspectives, The Laffer Curve Brings Red Ink to Red States. It seems that over the past few years, Art Laffer has been going around the red states and selling the usual supply side economic nonsense. If you were around in the 1980s, you are very familiar with it, “You will get more tax revenue if you cut taxes!” The idea is that cutting taxes will cause the economy to grow and so more taxes will come in. It sounds too good to be true because it is.

Let’s talk a bit about the Laffer curve. It isn’t actually a concept of Laffer’s, it’s just that he’s the guy who made it popular among Republicans in the 1970s. The idea is that if taxes are too high, people will not work as much or will find ways to avoid paying taxes. For example, a 100% tax rate would produce no tax revenue because there would be no incentive to work. More or less. But a photo in Perr’s article that looks like it is from the 1970s really struct me. You can go over and look at it, but here is my standard Laffer Curve graph and it shows the same thing:

Laffer Curve

There is no reason to think the Laffer Curve would be symmetrical. Indeed, when real economists (and I have a hard time putting Laffer in that category) deal with it, they don’t make it symmetrical. In fact, an article in The New Palgrave Dictionary of Economics shows that estimates of the rate are around 70%. So why did Laffer present his curve as being symmetrical?

I think it’s the timing. In the 1970s, when he was first using the Laffer Curve to argue for lowering taxes, the top marginal tax rate was 70%. And this default Laffer Curve says that the optimal rate should be 50%. And what was the first top marginal tax rate that Reagan got? Fifty percent! The Laffer Curve was and always will be a propaganda device. As Laffer admits, the idea was not new to him. But the reason his name was put on it was because he proposed the idea that you could lower tax rates (the top one especially) and increase tax revenues. But that just wasn’t true at the tax rates we had then (which are much higher than they are now).

The result: tax revenues went down. But somehow this fact is not known by conservatives. That, or they just don’t care:

What Perr noted was that after Laffer did his tour, many red states followed his lead and enacted the same failed policies the Republicans have been pushing for four decades. And the results have been predictable. He discussed New Jersey and especially Kansas. But the truth is that this has been going on in a lot of red states, although generally with less catastrophic consequences. But this is why, for example, Scott Walker and his Republican legislature cut school funding while giving businesses tax breaks.[1] That sounds loony to liberals but it makes perfect sense in the world of Laffer propaganda.

Perr ended the article with a 2012 survey of economists that didn’t find anyone who thought that a cut in the federal tax rates would increase economic growth over a five year period. There’s a reason for that. In a depressed economy, forcing the federal government to borrow less will not make more money available to the private sector to borrow and invest. As I point out all the time, companies are sitting on piles of money not knowing what to do with it. But Laffer wasn’t going around telling red states to cut their top taxes because it would be good for the economy. I’m not even sure how that would happen at the state level. Laffer was doing it because he’s looking out for the interests of the rich. Check out this graph from Kansas on their tax cut:

Kansas Tax Cut

This is modern conservatism. I don’t think Art Laffer especially wants to make the lives of the poor worse—he’s just looking out for the rich. But the Kansas legislature was certainly trying to send a message with this distribution.

[1] Politifact, in their typical fashion rated this claim false. But if you read the text, you will see that it is actually true. On the issue of school funding cuts, they say the original claim was twice what Jennifer Shilling said. So the schools were not cut by $1.6 billion but by $800 million. In other words: Scott Walker cut school funding by a whole bunch. Politifact gave that a “mostly false” rating. On the issue of tax breaks, Politifact gets into a semantic debate about whether tax breaks actually cost tax payers any money. They give that claim a rating of “half true.” This is why everyone thinks Politifact is a joke.

This entry was posted in Uncategorized by Frank Moraes. Bookmark the permalink.

About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

Leave a Reply

Your email address will not be published.