Arthur Laffer has been an influential presence in American economic thinking for more than three decades. He was central in ushering the massive prosperity overseen by Ronald Reagan through a revolutionary way of thinking about taxation, as exemplified in his invention the Laffer Curve, which charts tax revenues against rates. In this incisive interview he explains what government should and should not be doing to get the U.S.’s lagging recovery in gear and why he’s optimistic about the economic future.
Octavian Report: Do you think that any of the current GOP candidates have the will to produce actual change if elected?
Arthur Laffer: My view of this primary stuff is that politicians are united by one single characteristic not shared with most of the rest of the population. These people are united by the fact that they had bad mommies. These are people who did not have a value system instilled inside of them. Reagan probably spent three hours a day getting dressed. You've never seen a picture of Reagan with a hair out of place. Jack Kemp was an usher in my wedding. We would walk down Michigan Avenue in front of Marshall Field’s, past those big glass windows that you can see your own reflection in. He would flex in front of those and do his hair.
The neat thing about America is you can actually elect the president here. And candidacy is the perfect role for people with this characteristic because they become living, breathing, poll-taking machines. By the time the primary is over, my best guess is you're going to get a candidate out of this process who is really fantastic and really reflects the mood of the electorate in a democratic sense of the word.
OR: Where do you think the mood of the country or the mood of the party is going to push whoever gets the nomination?
Laffer: I think we need far less compromise on basic principles of economics. You can't tax an economy into prosperity. Forgive me for saying that, but you can't. A poor person can't spend himself or herself into wealth. Stimulus spending and taxation are the two biggest detractors of this economy. They are the reason why we've had the single worst recovery in history. We've got to reverse those and move towards the flat tax, sound money, free trade, spending restraint, and minimal regulations. The further we move in those directions, the better off the economy will be and the better off every single American will be. All any pandering does is cause everyone else suffering.
OR: Why does this agenda seem to be tied permanently together with isolationism and social ultraconservatism?
Laffer: I don't know. Maybe it's because there are only two parties, and you have to get 57,312 characteristics into each. When we came in in 1981, we had all of those elements in the Republican Party. We had the Pat Buchanans, we had the religious right, all of that stuff.
OR: You’ve long advocated the flat tax, a complete and radical overhaul of the tax code.
Laffer: Does the flat tax sound right-wing to you?
OR: It sounds very libertarian.
Laffer: Let me tell you who ran on it. In 1992, Jerry Brown ran on a complete flat tax. I worked with him on that campaign. We got rid of the personal income tax. We got rid of the corporate profits tax. We got rid of all payroll taxes. We got rid of the Medicare and Medicaid taxes -- all of them. We got rid of all excise taxes. We got rid of all tariffs. And we went from eighth in the Democratic primary to second. We would have beaten Clinton had Brown not named Jesse Jackson as his running mate just before the New York primary.
There is a strong, strong feeling in this country towards the flat tax. Everyone thinks of it as being fair. You all pay the same rate. If you make 10 times as much as I do, you pay 10 times as much in taxes.
OR: Do you think that Obama is out of step with the general view of the country on that question?
Laffer: I don't know about that, but he's out of step with economics. He doesn't understand word one. If you tax rich people and you give the money to poor people, you're going to get lots and lots of poor people and no rich people. It's straight, basic economics. If you reward behavior, you're going to get more of it. If you punish behavior, you'll get less of it. He is paying people not to work and he's taxing people if they do work. It's just outright stupid. Warren Buffett, remember, in 2010 paid $7 million in taxes. His income, conservatively estimated, was $12 to $13 billion. His effective tax was six one-hundredths of one percent. And he advocated raising tax rates on things that he hadn't paid taxes on, for which he got the Presidential Medal of Freedom. That was his reward for being duplicitous -- legally duplicitous, mind you, but duplicitous.
OR: There’s a lot of commentary now that supply-side economics, including your invention the Laffer Curve, has been discredited.
Laffer: I didn't come up with the Laffer Curve. And you can’t discredit it. It’s been economics for a thousand years. The earliest explicit reference to it was in the Muqaddimah by Ibn Khaldun -- which was written about 1,200 years ago. People like doing things they find attractive and don't like doing things they find unattractive. Government policies can affect the attractiveness of specific activities. That's why I say the last thing you want to do is raise taxes on work and increase payments for non-work, leisure, and unemployment. John Maynard Keynes has the most cool reference to this phenomenon I have ever seen. You can over-tax products to the point where you actually get less revenue.
OR: What would Keynes be thinking about what’s been going on economically in recent years?
Laffer: Keynes would be right in line with me. He was writing about the Great Depression. He wasn't talking about a standard behavior of government. The Keynesian model he meant to be a desperate, final attempt to pull a system out of a crushing and historically bad depression. He never agreed with liquidity traps for anything other than the most extreme cases. Once every thousand years you would do something like that: quantitative easing and Operation Twist. The IS and the LM curves are not natural states, according to Keynes. He understood this very well, as you can see if you go to any of his writings. He understood classical economics really, really well. He wrote this stuff to address a very unique, special situation in the world called the Great Depression.
Dr. Arthur Laffer is founder and chairman of Laffer Associates and was a member of President Ronald Reagan’s Economic Policy Advisory Board.