Economist Arthur Laffer discusses tax policy, economic growth
Natalie Weber | Wednesday, April 18, 2018
Commonly known as ”the father of supply-side economics” and creator of the Laffer curve, economist Arthur Laffer advocated for a flat tax system and lower economic regulations Tuesday during a lecture hosted by the Young Americans for Freedom.
To create a prosperous economy, a country should implement a low tax rate and ensure people are paying similar rates regardless of income bracket, Laffer said.
“You want a low rate, broad base flax tax system,” he said. “You’ve got the low rate to provide people with the least incentives to evade, avoid or otherwise not report income and you want a broad base tax to provide people with the least number of places they can put their income and avoid taxes.”
Sound money, spending restraint and free trade are also key ingredients of a flourishing economy, Laffer said. Additionally, he said, a government should minimize regulations and allow the economy to operate as freely as possible.
“You need regulations, but what you want to make sure is that these regulations do not go beyond [the] specific purpose at hand and create a lot of collateral damage to the economy,” he said. “So you want regulations, but you want low or minimal regulations to achieve your objective.”
Laffer discussed the relative growth and decline in Gross Domestic Product per adult over the years, which hit a significant high during former president John F. Kennedy’s administration. This peak, he said, was a direct result of Kennedy’s sweeping tax cuts.
“The economy growth in that period was called ‘go-go 60’s,’” Laffer said. “If you look at real Gross Domestic Product per adult de-trended, the thing goes right through the ceiling under John F. Kennedy.”
Both former presidents Ronald Reagan and Bill Clinton also created tax policies conducive to growth, Laffer commented. During Laffer’s time as an advisor to Reagan, the administration enacted sweeping tax cuts, which Laffer said dramatically increased economic productivity.
“We cut the highest marginal income tax rate in the U.S. from 70 percent to 28 percent,” Laffer said. “We cut the corporate rate from 46 percent to 34 percent. We cut the capital gains tax rate, deregulated the economy, proposed and wrote NAFTA. If you look at the real Gross Domestic Product per adult de-trended it just [explodes] — not quite as good as Kennedy, but it really did well.”
Compared to these policy changes, the Trump administration’s recent tax reforms have brought about similar levels of economic growth, Laffer said.
“What Trump did in this tax bill, which I worked on with him a lot, is he cut the highest [business tax] rate from 35 percent to 21 percent,” Laffer said. “He cut the personal income tax rate from 39.6 percent to 37 percent. He cut the pass through tax rate from 39.6 percent to 28.6 percent. … It is the best tax bill I have seen in any administration of the U.S. in the president’s first term. It’s amazing and it bests Kennedy’s [tax bill] as well.”
Laffer also discussed the tax reforms of 1986, when Congress began moving towards a flat tax model, creating similar tax rates for citizens regardless of income.
“We got rid of all these deductions, exemptions and exclusions and loopholes,” Laffer said. “We made it exactly revenue neutral. We cut the highest rate from 50 to 28 [percent], cut the corporate from 46 to 34 [percent], raised the lowest rate to 15 percent. We had two [tax] brackets … and that’s it.
“Can you imagine that tax bill today in Congress. No? Not a chance. There wouldn’t be a Republican or a Democrat who would vote for that today. There really wouldn’t. Guess what the vote was in the Senate in 1986? The vote was 97 to 3.”
Still, Laffer said he remains confident in the U.S. economy.
“When you look at the state of the U.S. economy today, my view is you are going to see an enormous expansion of the U.S. economy within the next 50 years,” he said. “I think you’re going to see a real explosion of upward growth and employment and I just want you to all to know that the best, in my opinion, is yet to come.”