A Laffer minute

The fifteen minutes of fame for Arthur Laffer and his pet theory, the Laffer Curve, were a long, long time ago.  I was only dimly aware that he was still alive (he's 78).  But then this past week, Donald Trump announced that he would be awarding Laffer the Presidential Medal of Freedom, calling him "one of the most influential economists in American history".  This is not an assessment most economists would share.

Laffer's claim to fame (among Republicans) or infamy (among economists) rests solely on the Laffer Curve.  The folk tale is that Laffer drew it on a napkin for President Gerald Ford in an effort to convince him that cutting direct tax rates would actually lead to an increase in government revenues.  This lengthy Wikipedia article is a reasonable summary.

It's arguable that the Laffer curve, or at least the work Laffer himself has done on it, isn't really economics at all.  Two points on the curve are trivially true: if tax rates are zero, revenue will be zero (duh), and if tax rates are 100 percent revenues will again be zero, because nobody will go to work solely to hand over all their earnings to the taxman.  There's also a third observable number: we know at any time how much money is raised at current tax rates, but all we can definitively know from that is that at some point between zero and 100 percent tax rates, some taxes are definitely paid.

Laffer seemingly wanted Gerald Ford to believe that tax cuts would always raise revenues and higher tax rates would always reduce them. A real economist, having come up with the bare bones of the idea, would have tried to find ways to test it against empirical data.  That was never Laffer's plan, perhaps not surprisingly when you consider what actual empirical research -- you know, economics, -- has found out.

As the Wikipedia summary suggests, research studies have found that the revenue-maximizing direct taxation rate is somewhere in the range of 65-70 percent!  Only above that level do disincentive effects outweigh the higher tax rate and lead to a loss in revenue.  These rates are so far above the marginal tax rates now prevailing in the United States that it's ridiculous to suggest that cutting taxes will boost government revenues.  Unsurprisingly, the tax cuts implemented under Donald Trump, at the urging of Arthur Laffer and his ilk, have pushed the Federal Government precipitously toward  the largest budget deficits in its history, at a time when steady growth in the economy would have been expected to lead to an improving fiscal position. 

Laffer was on the morning talk show circuit this past week basking in his newly-found glory.  As usual he simply denied the facts about the impact of the policies he advocates, without offering a shred of evidence to the contrary.  I suppose pushing the US toward bankruptcy makes you an influential economist all right, but not in any sense that should get you a Presidential Medal.