You might think taxes are high today, but thanks in large part to Arthur Laffer, they’re lower
than they were a generation ago. Laffer, a member of President Reagan’s Economic Policy
Advisory Board, is widely regarded as the father of supply-side economics. He is perhaps
best known for the Laffer Curve, which illustrates the Keynesian theory that increasing
taxation past a certain point actually lowers government revenue, and vice versa.
As CEO and founder of the Nashville consulting and research firm Laffer Associates and as a
regular contributor to BizRadio, Laffer now provides expert advice to the private sector. EQUITIES
sat down with the famed economist to discuss his theories, the market, and the future of America.
EQUITIES: What lead you to move to
Nashville?
Laffer: Well, it’s a real simple thing. If you
have two locations, A and B, and if you
raise taxes in A and lower them in B, producers,
manufacturers, and people are going
to move from A to B. If you look at
San Diego, it has the highest state income
tax rate, 10.3%. Here in Nashville, it’s zero.
EQUITIES: You recently wrote that California
has the smartest, nicest, best-looking
people in the world. Is that changing
because of this?
Laffer: California’s a wonderful location.
Unfortunately, the government’s
gone completely awry. It’s made it very
unfriendly for people to work, produce,
have jobs, and have businesses there.
As a result, I picked up and moved. I’m
very pleased here in Nashville.
It’s a lovely city. It’s very affordable
and very convenient
to most of my marketplaces as
well. Unfortunately, California
is so expensive, so offensive because
of government that a lot
of the beauty and wonder of
California is just not worth it.
The projected budget is now
over $14 billion and the governor’s
calling for a 10% acrossthe-
board cut in all spending. You
know, it’s a fiscal crisis of incredible
proportions and has been
since I left. I was on the Governor’s
Council of Economic Advisors
and I warned him about all of these
things, but nonetheless, he and the government
there really are going down the
wrong road. I don’t want to live in a place
that’s crashing. It’s just no fun, especially at
my age. You read the “California, Who
Are You?” paper, did you?
EQUITIES: Yes, I did.
Laffer: That was the paper I wrote when
I left California. That was the one I gave
to the governor when he gave his State of
the State Address in January of 2006. So
that’s when I made my decision to leave.
EQUITIES: Can you tell me about Laffer
Associates?
Laffer: This firm started in the late 1960s,
and our basic client base is made up of
money management firms, planned sponsors,
trust departments, and pension
funds of corporations.
EQUITIES: Are there any policy issues that
you’re working on today?
Laffer: I’m working on a lot of issues
right now. In fact, I’m looking at what
would happen if the Democratic proposal
to raise taxes in the upper incomes
and lower tax rates on middle- and lowerincome
people actually went about. It’s a
very technical analysis. I looked also at
capital gains. We’re in a credit crunch, and
we’re working with our clients on that.
EQUITIES: Does it make a difference who
becomes president?
Laffer: The Democratic proposal would be
a very serious fiscal problem. You’d have
an enormous budget deficit if you raise
tax rates in the upper incomes and lower
them on middle and lower incomes.
EQUITIES: Where is the Laffer Curve relevant
today?
Laffer: It’s relevant in everywhere, in every
country. You find that it’s unambiguously
true that when you raise tax rates on the
top 1% of income earners, the revenues
go down. And it’s unambiguously true
that when you lower the rates, the revenues
go up—and have done so for a
long, long time.
When you look at those countries that
have really done supply-side economics
by cutting tax rates, sound money, free
trade, open borders, and minimal regulation,
those countries have performed
extraordinarily well in the global economy.
If you look at what happened to
the United States, let’s say, from 1982
on, we just had an incredible stock market
boom, strong dollar, all of that. Then
you look now at what’s happened since
2002, with all the tax reforms in the rest
of the world, and you can see their improvement.
Their assets have appreciated
dramatically faster than the United
States’. If you look at even individual
episodes, like what happened in mainland
China, what’s happened with India,
these are all supply-side stories. Compare
them with Japan, where you’ve had
no supply-side changes over the last 20
years. You can see the differences in asset
returns. If you make them efficient,
if you make them pro-growth, they’ll return
many-fold the profits to the shareholders
who invest.
EQUITIES: What brought you together
with BizRadio?
Laffer: A guy named David Wallace
knew [BizRadio founder
Daniel Frishberg] very well. He
thought it would be a perfect
mesh. And he was right. Some
of the things I do help BizRadio
a little bit. And BizRadio’s a perfect
outlet for me. It’s a marriage
made in heaven.
EQUITIES: When I saw you speak
at the BizRadio event in Houston,
you said that the current
deficit is not a bad thing for the U.S.
Would you explain that?
Laffer: We ran a trade deficit from 1640
until about 1870. We built our country
on foreign capital, and it was a huge
plus for us. Foreigners provided us with
the resources to increase our production
productivity and allowed us to
grow much faster and become much
wealthier very quickly. It’s like an angel
investor. And that has been true for the
last 20-some years here in the U.S. Although,
unfortunately, because of the
way U.S. policies are changing and the
way they’re changing in the rest of
world, it looks like that capital surplus
we’ve been experiencing will dry up
very quickly. And I’m very worried
about that.
EQUITIES: Was Reagan’s economic policy
a success?
Laffer: Yes, very much so. And by the
way, I don’t mean to say it was just Reagan;
it was Bill Clinton as well. Bill Clinton
did a great job. What he did was he
pushed NAFTA through Congress. He
cut government spending. He reappointed
Reagan’s Fed chairman twice. He
signed into law the welfare reform. We
had the biggest capital gains tax cut in our
nation’s history. We got rid of the retirement
tax on social security. Clinton did a
very good job. The only mistake he really
made was raising those tax rates.
EQUITIES: So today, would you take a position
in the White House?
Laffer: No! I don’t do those
jobs well. You know, I really
don’t. I worked in the White
House from 1970 to 1972. I
was George Schultz’s righthand
person back then. I was
the first chief economist when
they formed the Office of
Management and Budget. And
I got a lot of experience there,
but I didn’t like it. I’m not a
guy who does long meetings
well. And I’m much better doing
what I do. With Reagan, it
was perfect. I’d go in and talk
with him for half a day, and
then I’d go home. He could take or not
take my advice, and I didn’t have all the
frustrations of working in that type of
environment. Some people are really
good in that environment, but frankly
I’m not.
EQUITIES: So far for 2008, the markets
have been shaky; there’s a lot of commotion.
Where should investors look?
Laffer: What you’ve got happening here,
which started about mid-2007, is real
credit crunch, a shift in the demand
curve of money—a very radical shift.
Whenever you have a radical shift in
the demand curve out, you get a shortage
of capital, and that’s when the Fed
should expand the monetary base and
cut the federal funds target rate. The
Fed didn’t do it. And they’ve precipitated
this crisis, which is really a shame
because it wasn’t necessary. And they’ve
still got a long way to go on lowering
the federal funds target rate and expanding
the monetary base. Right now,
I have been cautious for the last three
months, and you should be very, very
defensive at this time. I’m just very worried
about public policy, and I look at
the investments always from a public
policy perspective.
EQUITIES: So then what’s the policy fix?
Laffer: Number one, Ben Bernanke has
to cut the federal funds target rate another
hundred basis points right away.
It’s a tax on bank’s lending. It’s been
constrictive on credit and has caused a
credit crunch and the current market
collapse both here and abroad. Also, if
you know that interest rates next month
are going to be lower than this month,
what do you do this month? You postpone
all the economic activity you can.
I think they have already precipitated a
recession, and the sooner they cut the
federal funds target rate by a hundred
basis points, the less damaging that recession
will be.
The second thing is, they should extend
the Bush tax cuts and make them
permanent. If they raise those tax rates
again, you could cause a real collapse in
the economics that would not be over in
a year. It would take years and years to
undo that damage. Once you get your
factories overseas, once you get your productive
entrepreneurs overseas, once you
get the London capital market dominating
New York, it’s really hard to win the business
back. Our corporate tax rate today is
one of the highest in the world. When we
lowered it, it was one of the lowest in the
world, but they’ve all matched us. And
this would only accelerate it if they really
allowed those tax rates to bounce back up.
EQUITIES: So in this environment, there’s
all this pressure to lower taxes. At what
point does that go away?
Laffer: It took a long time for these
notions of redistributionist economics
to conquer the world. And we’re
only now starting to come to grips
with the real problems caused by the
progressive income tax. The
U.S. is moving very much in
the right direction, only now
the rest of the world’s moving
faster. And we will come
to a situation where the world
has sorted out these problems
and we’ll have a much more
even balance, at least with regard
to taxes, regulations, tariffs,
and quotas. It will be a
globalized world where people
can really move and produce
where costs are the minimal
and benefits are the best.
But we have a ways to go before
that’s over, maybe another
30 years.
You know exactly what it takes to create
a prosperous economy. From economics,
it takes four things: It takes low
taxes, fiscal solvency, soundness, and restraint.
It takes a sound money. It takes
free trade, minimal impediment for the
free flow of goods and services across national
boundaries, and people moving
over national boundaries. Tariffs, quotas,
restrictions on trade, all those kill an economy.
It takes minimal regulation to
achieve the objections you really need
with the regulation. The four killers are
fiscal policy, monetary policy, trade policy,
and income policies. Every single recovery,
every single bull market in the U.S. has
been associated with low, flat-rate taxes,
sound money, free trade, open borders,
and minimal regulation.
— By Anthony W. Haddad
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