Economist Arthur Laffer spoke to a full lecture hall on the economic incentives of lowering taxes on the rich in an event hosted by the Ciceronian Society and sponsored by the Young America's Foundation.
Laffer is best known for developing the Laffer curve, which illustrates the theoretical relationship between the tax rate and the total tax revenue. Laffer argued that if taxes were raised above an ideal tax rate that maximized the total tax revenue, taxpayers would change their behavior in response and shrink the tax base, thereby decreasing total tax revenue despite the higher rate of taxation.
He also served as a member of former President Ronald Reagan’s economic policy advisory board and was later an economic advisor for former President Donald Trump’s 2016 presidential campaign. Laffer also earned the Presidential Medal of Freedom from Trump in recognition of his contribution to economics.
Laffer began by pointing to taxes on alcohol, speeding and cigarettes and arguing that these taxes are meant to disincentivize alcohol consumption, speeding and cigarette use.
He then drew parallels to taxing income-earners, employers and profitable companies. Taxing these groups, he argued, has the unintended consequence of disincentivizing work and decreasing economic activity.
“Don't think for a moment that just because our motive is not to get them to stop doing what they do … that that is not a consequence of [taxation],” Laffer said.
‘Taxes have consequences’
In his 2014 book, “An Inquiry into the Nature and Causes of the Wealth of States,” Laffer compared 19 states that introduced an income tax between 1961 and 1991 to the remaining 39 states.
He found that “every single one of those states, without a single exception, in every single metric declined relative to the rest of the nation.”
In Michigan, for example, Laffer said former Gov. George Romney introduced an income tax that reduced Michigan’s value in the U.S. economy from 5.2 to 2.7%.
“If you tax wealthy people and pay poor people, you get lots and lots of poor people,” he said.
Laffer’s most recent book is called “Taxes Have Consequences: An Income Tax History of the United States.” In it, he traces the history of U.S. tax policy beginning with the first income tax in 1913, and analyzes decades worth of tax returns.
Laffer came to three major conclusions through his analysis, all in favor of lowering taxes on the rich.
His first takeaway was that the economy underperforms when the government raises the highest marginal income tax rate, and that the economy overperforms when the government cuts the highest marginal income tax rate.
Laffer also found that increasing the highest marginal income tax rate leads to greater “sheltering” of wealth. Wealthy Americans have the means and the incentive to move their money into the hands of others, but greater tax rates incentivize them to hoard their income.
Laffer’s final takeaway was that higher income taxes actually decrease tax revenue from the rich.
“Taxes have consequences,” Laffer said. “It's not a left-wing thing. It's not a right-wing thing. This is called economics.”
Transfers and income redistribution
Laffer discussed transfers in the context of income redistribution, arguing that transferring money away from people with higher incomes to people with lower incomes reduces both parties’ incentives to work.
“If you tax people who work and pay people who don’t work, you’re going to get less people working,” Laffer said. “Every time you redistribute income, you reduce total income. Now that doesn't mean you don't do it. But that is the consequence of transfers.”
Laffer then applied this concept to the extreme case in which income is redistributed so that everybody earns the same amount, by taxing those earning above the average income while subsidizing those earning below that average.
He stated that if people could “theoretically redistribute the total income so that everyone had the exact same income, there would be no income.”
“You're wondering why we're having a problem in the US economy for the last 15, 20 years … And it's not only here, it's everywhere in the world. It's just plain bad economics,” Laffer said. “And any professor who tells you government spending stimulates the economy and increases output employment … you just don't understand general equilibrium and understand what economics is all about.”
The pillars of an economy
As a whole, Laffer argued that “all taxes are bad, but some taxes are worse than others.”
For Laffer, a government’s goal should be to collect in the “least damaging fashion possible” enough revenue for it to conduct its most essential functions. Under this concept, the ideal tax rate would be the lowest possible tax rate with a largest possible base of people to tax, thereby reducing any potential incentives to evade taxes.
“When the last dollar spent is slightly more than the cost from the last dollar collected, you stop, that is the optimal size of government,” Laffer said. “Any government smaller than that can be expanded and the government larger than that should be contracted.”
“We need regulation, but we need to make sure that those regulations do not go beyond specific purposes,” he continued.
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Jothi Gupta is a Trinity sophomore and a university news editor of The Chronicle's 119th volume.