The GOP Heads Straight for the Laffer Curve
The corridors and conference rooms of Laffer Associates’ headquarters in Nashville are lined with fossils of ancient animals and photos of dead statesmen. But Arthur B. Laffer, the economic research firm’s chairman, is no relic. At age 70, Laffer bounds around the office, as vibrant as he was on the 1974 evening in Washington when he first sketched the arc that became known as the Laffer Curve.
Over dinner across the street from the Treasury Dept., Laffer scribbled on a napkin to show rising GOP stars Dick Cheney and Donald Rumsfeld how cutting high marginal tax rates could boost tax revenue. With lower rates, investors would create taxpaying businesses and hire workers, providing a windfall for Uncle Sam. Higher rates might sap people’s incentive to work. Almost four decades later, Republicans’ obsession with taxes proves the staying power of Laffer’s simple idea.
Among 2012 Republican Presidential candidates, Representative Michele Bachmann has pronounced herself an “Art Laffer fiend.” Newt Gingrich, the former House Speaker, unveiled his economic program in May at Laffer’s annual Washington investment conference. Front-runner Mitt Romney “believes increasing revenues can be a result of reducing tax rates,” says spokeswoman Andrea Saul. Minnesota’s former governor, Tim Pawlenty, touts a Lafferesque growth plan that would cut taxes and, he claims, reduce projected deficits by almost half before cutting spending. “These Republican candidates are world class,” Laffer says, almost leaping from his chair. “The whole field’s wonderful!”
Some of the would-be Presidents even flirt with the most extreme strain of Lafferism: The idea that tax cuts generate so much added growth that they pay for themselves. It’s a view that has been rejected by economists of both parties. Austan Goolsbee, chairman of the President’s Council of Economic Advisers, authored a 1999 paper disputing the Laffer Curve. He calls its resurgence “a way to claim there’s not a budgetary impact from cutting taxes for high-income people.”
In the late 1970s, the Laffer Curve popularized the theory that if the top marginal tax rate were above its optimal point, a tax cut would increase total revenue. In practice, the 1981 Reagan tax cuts left revenues about 30 percent below where they would have been if rates hadn’t changed, says Lawrence B. Lindsey, director of the National Economic Council in the Bush Administration. The Bush tax cuts cost $1.5 trillion in lost revenue over 10 years, the Congressional Budget Office estimated last year. “The notion that a broad decrease in tax rates raises revenue was never taken seriously by professional economists,” says Alan D. Viard, who worked for the Treasury Dept. on tax issues in the George W. Bush Administration and is now at the American Enterprise Institute in Washington.
Given to occasional overstatement, Laffer is as much salesman as scholar. The former University of Chicago professor and part-time economic adviser to Reagan told People magazine in 1979 that unless income taxes were reduced by one-third, “our kids will be living in the equivalent of Ethiopia.” Yet sometimes the hyperbole falls away, and Laffer seems to acknowledge the danger of politicians running too far with his simple insight. “The Laffer Curve is really a pedagogic device,” he says. “It’s not something to be too literal.”
Many mainstream economists, including conservatives, would agree. As a result of the wounded economy, federal tax revenue in 2011 is expected to be 14.4 percent of gross domestic product, the lowest level in 61 years. Industry is operating at a recessionary 77 percent of capacity. Tax cuts aimed at stimulating investment and production, many economists say, are the wrong medicine for what ails the weak recovery. “It doesn’t make much sense to increase the supply of goods and services at a time of excess capacity,” says economist Bruce Bartlett, a veteran of the Reagan White House and the Treasury Dept. under President George H.W. Bush. “Under current circumstances, the problem is a lack of aggregate demand.”