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Art Laffer, a prominent econ­omist, spoke at Hillsdale College Monday night. Wiki­media Commons

Art Laffer is a prominent supply-side econ­omist who served as a member of former Pres­ident Ronald Reagan’s eco­nomic advisory board and as an adviser for Pres­ident Donald Trump’s 2016 cam­paign. He is well-known for devel­oping a theory about the rela­tionship between tax rates and tax rev­enues, now referred to as the “Laffer Curve.” Laffer is founder and chairman of Laffer Asso­ciates in Nashville, an eco­nomic research and con­sulting firm for global financial markets. He has written several books, including “Return to Pros­perity: How America Can Regain Its Eco­nomic Super­power Status.” He delivered a lecture at Hillsdale College on Jan. 21  entitled “Trumpo­nomics: An Eco­nomic Overview of America Today.”

 

The story goes that you first drew your famous Laffer Curve on a restaurant napkin. Can you tell me more about that night?

It wasn’t the first time ever. I had used it in my classes for years and years. It’s a very straight­forward concept that gov­ernment, like any price-maker, can over­price a product and therefore get less rev­enues, and can under­price a product and therefore get less rev­enues as well. Now there were a series of dinners in Wash­ington on and around 1974 where I did use it with regard to Jerry Ford’s “Whip Inflation Now” — his WIN program — where he pro­posed a tax increase that would stop inflation, it would increase rev­enues and all that. I tried to explain to my classmate Dick Cheney, who was my classmate at Yale, and Don Rumsfeld, a dear friend, that you might not get as much revenue as you think. Now you might get more revenue, but you sure as heck won’t get as much as the tax rate increase. And you might even get less revenue. And that was sort of a rev­e­lation to them, because before that time, if you raised tax rates by 10 percent, they assumed rev­enues went up by 10 percent. And we know that’s not true, that rev­enues will not go up by 10 percent. They may go up by 9 percent, they may go up by 6 percent, they may even fall, but they won’t go up by 10 percent.

There’s a napkin in the Smith­sonian, from me, that I believe was a re-cre­ation two years later of the curve at dinner that became famous. Someone asked me to re-do it as a neatly-written one. If you look at the one at the Smith­sonian, it’s very pre­cisely drawn, very neatly done. That’s not the sort of thing you would do in a heated con­ver­sation at dinner on a napkin.

 

You were a member of former Pres­ident Ronald Reagan’s Eco­nomic Policy Advisory Board. What was one of your favorite mem­ories from working in the Reagan admin­is­tration?

Let me be really blunt about it. There are a lot of econ­o­mists who work for the gov­ernment and get their pay­check from the gov­ernment, and once you do that you lose your inde­pen­dence, you lose your integrity. These people will rebut argu­ments they know to be true in order to curry favors with their political bene­factors, and I have no desire ever to have that be the case. When I was with Reagan, he didn’t pay me. I was on the president’s eco­nomic advisory board. I spent lots of time with him. There were times when he was miffed by me and my answers. He didn’t like them. But nonetheless I didn’t have to change my answers. I could give him my unvar­nished, clear views. And it worked out pretty well.

He was not nat­u­rally a tax-cutter. I know everyone tells you he was and all that. They tell you he was a free-market con­ser­v­ative. That’s not true. Ronald Reagan as gov­ernor was the biggest tax increaser in Cal­i­fornia history up to that point in time. He was the biggest spender on social policies of any gov­ernor up to that point in time. He elim­i­nated almost all the anti-abortion statutes in the state of Cal­i­fornia. That was the gov­ernor of Cal­i­fornia. By the time he got to be pres­ident, he was the best pres­ident we’ve ever had. He learned by his mis­takes, and he evolved in becoming a really great, great person and pres­ident. And I have loved him dearly. But don’t think of him as being born in a manger with a star up in the sky. He was a human just like you and me.

 

Were you involved in the cre­ation of the new tax law in 2017 that took effect on Jan.1, 2018?

Yes, I was very, very, very heavily involved — with the House, with the Senate, and with the admin­is­tration. It sort of reflects all the things I believe to be won­derful in eco­nomics. I couldn’t have imagined a better bill for three major reasons: First, it cut the cor­porate tax rate from 35 percent to 21 percent. The 35 percent was the highest cor­porate in the Organ­i­sation for Eco­nomic Coop­er­ation and Devel­opment — that’s 34 coun­tries. And we brought that down to 21 percent which put us in the middle of the pack. No. 2, we had 100 percent expensing of capital pur­chases, which really increases the internal rate of return for invest­ments, pro­duc­tivity, output — it’s just an amazing thing. And No. 3, the U.S. has his­tor­i­cally been the only country in the OECD to have a global tax system, and we put in a ter­ri­torial system which gave us a level playing field for our com­panies to compete with foreign com­panies.

 

What do you think of Pres­ident Donald Trump’s tariff policies?

I don’t know what they are yet. I have talked with the pres­ident on several occa­sions, and he assures me that he is a free­trader, and I have no reason to doubt it. He tells me that he’s using the pressure of tariffs rather than the actual impo­sition of tariffs to get them to the nego­ti­ation table, to nego­tiate a deal to get tariffs reduced worldwide, for the benefit of not only foreign coun­tries, but also for the U.S. When he left the Group of Seven meeting in Ottawa, he said if you guys will all reduce your tariffs to zero, so will the U.S. I really believe he is a free­trader, but he’s using this as a nego­ti­ation tactic. And it scares me. I don’t under­stand nego­ti­ation tactics at all, and frankly, I hope it’s suc­cessful. I think it will be. Free trade is very, very important for our country and for other coun­tries. It’s a key to pros­perity.

 

Could you tell me more about your latest book, “Trumpo­nomics”?

The book is a fun story about mine, Steve Moore’s, and Larry Kudlow’s inter­ac­tions with the pres­ident during the cam­paign and during the election then after he was in office. The three of us had very intense rela­tions with him. Larry Kudlow, who is mas­terful, is now head of the National Eco­nomic Council. Steve Moore is a won­derful writer and political pundit. We had a fas­ci­nating time working with him and this just sort of recounts all of that. It’s a fun read. It’s not a deep intel­lectual eco­nomic book.

You know, Trump is a very normal everyday human being. He’s a real person. And he’s — I think an amazing person. I’ve never seen anyone with the strength of char­acter of what Donald Trump has. I mean with these blis­tering attacks, how he can keep his cool is beyond my imag­i­nation.

Do you think socialism is becoming more popular in the U.S.?

In 1945 the highest mar­ginal income tax was 92 and a half percent which had to be passed in leg­islative form by the House and the Senate and signed into law by the pres­ident of the United States. Can you imagine that? I mean these are Repub­licans and Democrats, lib­erals and con­ser­v­a­tives. The liberal would say any­thing lower than 92 and a half percent is a giveaway to the rich people. And the con­ser­v­a­tives would say yeah but any­thing above 92 and a half percent is excessive gov­ernment. The world has changed and that rate has come down now to where it’s 37 percent. That’s a huge drop! The cor­porate tax rate was up to 80 percent, now it’s down to 21 percent, I mean, that’s amazing.

Unions used to control every­thing in this country; now we have a majority of the states that are right-to-work. If you look at the death tax, one state in 1976 did not have a state death tax. And they almost all of them have gotten rid of their death tax. It used to be against the law to sell products on Sat­urdays and Sundays. Dis­count houses — Walmart and Costco and all those — were illegal. So if you look at it, it’s amazing; we’ve been winning. We do have set­backs all the time. We had Obama, which was a setback, but now we’re moving again. Socialism is not winning in America, believe me when I tell you that. California’s tax rate under Reagan was higher than it is under Jerry Brown. Yikes!

 

In 1983 you earned the Father of the Year award from the West Coast Father’s Day Com­mittee. Could you talk about bal­ancing an intense work life with family?

It’s tough bal­ancing an intense work life with an intense family life, but you’ve got to do it. I’ve got six children, I’ve got 13 grand­children, I have three great grand­children. They’re the love of my life, they’re my reason for living, they’re my every­thing. And I was really very proud most of all for the Father’s Day Com­mittee for giving me Father of the Year. It’s a real tough balance, and if anyone tells you that it’s easy, then they haven’t done it.