News coverage took on a sneering tone when President Trump pinned the Presidential Medal of Freedom — the nation’s highest civilian honor — on conservative economist Arthur Laffer.
“Trump awards kook Laffer for inventing fake curve,” one publication wrote in its headline. This wasn’t an outlier.
The Laffer curve is very real, though debate still rages on whether it proves what it intends to prove. It was unveiled with little fanfare, in a Washington restaurant in 1974, when Laffer sketched a turtle-shaped curve to illustrate his belief that reduced taxes can increase government revenue as economic activity accelerates. The audience for Laffer’s work was not inconsequential: Dick Cheney and Donald Rumsfeld were well-connected Republicans who would go on to work in future administrations.
Over the next four decades, Laffer’s theories influenced the supply-side economic policies of Ronald Reagan and Margaret Thatcher, leaders who made it a priority to increase economic growth through a reduction in both taxes and regulation. It wasn’t just conservative politicians. The highest income tax rates around the world, including Britain and France, have fallen from an average of 65 percent to 40 percent since Laffer’s ideas took hold. Sweden even abolished the estate tax.
The ideas became so mainstream that Democrats Al Gore, Bill Bradley, Joe Biden and Ted Kennedy voted in favor of a 1986 bill that reduced the highest income tax rate from 50 percent to 28 percent.
This was a period of strong economic growth, but now we’re witnessing a re-evaluation from a left that’s a lot further left than Kennedy in 1986. Bernie Sanders, Elizabeth Warren and Alexandria Ocasio-Cortez seek to tax top earners at around 70 percent, which happened to be the top bracket when Laffer took pen to cocktail napkin in 1974.
This soak-the-rich mentality didn’t emerge in the name of deficit reduction, which could at least be considered a starting point toward fiscal sanity. Instead, the word in vogue is “fairness,” which translates roughly into “resentfulness.”
Critics of Laffer focus on whether the tax cuts pay for themselves, but that misses the the bigger picture. Columnist Stephen Moore, writing in The Hill, argues that Laffer’s theories refocused tax policy from an emphasis on punitive revenue collection to growth-driven incentives.
Broadly speaking, if government reduces the burden on working or producing, then people will work more and produce more. We think that’s still true and backed up by economic results of the last three decades.
Perhaps the Laffer curve didn’t allow us to have our cake and eat it, too, but the fault there lies with the politicians who refused to make tough choices, not the economist who made the sketch.