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.