Profile in Courage: Dr. Arthur “Art” Laffer

Since the dawn of the discipline of economics, the field’s practitioners have been stuck in an identity crisis. Many economists have hidden behind an overly mathematicised view of supply and demand, trying to pigeonhole a complicated economic order into a series of narrow equations. Some academics have even tried to address recessions by “calculating” the exact amount of money that must be injected into the economy by central planners.

Fortunately, a few bold economists have elevated the dialogue by focusing on the big picture and the very real incentives that motivate and govern individuals and institutions. Enter Dr. Art Laffer, one of these bold thinkers. Dr. Laffer has received considerable acclaim (and backlash) for his view that higher taxation may in fact lead to less revenue. While reasonable people can and do argue about the “right” rate of taxation that keeps the economy and tax revenue chugging along, there’s little doubt that Laffer’s big idea won the day and changed the way the world looks at tax policy and growth. Laffer continues to forge ahead with his bold ideas, arguing even in the current populist moment that onerous antitrust enforcement is bad for consumers and the economy. And, for helping pivot the “dismal science” of economics back to pro-prosperity policies, Art Laffer is truly a Profile in Courage.

When Laffer earned his economics B.A. at Yale in 1963 and his Ph.D. at Stanford in 1972, economics was moving in an uninspiring direction. The curriculum and textbooks of the day were largely shaped by the thinking of economists such as Paul Samuelson, who registered confidence in the ability of Soviet-style central planning to keep the economy humming along. Similar to today, this approach “worked” until it didn’t, with escalating interest rates and inflation working in vicious tandem. In theory, inflation is less likely to spiral out of control if government spending doesn’t rise much higher than tax revenue. But there was a jarring and growing gap between spending and revenue even though taxes were sky-high. From the presidential administrations of Johnson through Carter, the top marginal income tax rate stood at 70 percent. Yet, income tax collections as a percentage of Gross National Product (GDP) were middling or declining throughout most of the 1970s. And, strangely, tax collections as a share of GDP were roughly the same as they were in the 1950s, even though top tax rates in the Eisenhower era sat above 90 percent.

A newly minted Ph.D., Laffer sought to make sense of the wacky relationship between tax rates and revenue collection.

The young economist suspected that then-President Ford’s gambit to raise taxes to curb inflation would not work, and reportedly sketched out his famous “Laffer curve” on a napkin during a 1974 dinner meeting with top Ford administration officials. The illustration was simple and showed that high tax rates can actually result in lower revenue…up to a point. In other words, there is a “Goldilocks” tax rate (not too high nor too low) at which maximum revenues can be collected. The key is that too-high tax rates can discourage productive activity, with fewer people going out into the economy seeking to innovate and earn a living ultimately leading to less taxable income and, ultimately, less revenue. While Laffer’s bold ideas failed to catch on right away, a rising political star by the name of Ronald Reagan took Laffer’s theories to heart and incorporated them into his policy proposals.

Less than fifteen years after the ink had dried on Laffer’s napkin, President Reagan had successfully lowered top tax rates to 28 percent and the economy charged forward in a record-long peacetime expansion. And, even as Reagan and his legislative allies repeatedly lowered tax rates (taking effect starting in 1982) income tax collections as a share of the economy held stable at around 8 percent – around the same share achieved by the far higher tax rates of the 1970s. Sure, tax rates were far lower under Reagan, but rapidly rising incomes meant a surge in total taxable income across the economy. Reagan unfortunately signed massive budgets into law, ensuring that red ink would continue to wreak havoc on federal finances. Yet, Laffer’s basic intuition was proven right that high spending – not low taxes – is the fundamental driver of deficits and inflation.

Laffer’s big picture extends far beyond tax rates and revenue collection. In a recent paper co-authored with Laffer Associates analyst John Barrington Burke, Laffer argued that recent antitrust proposals, “will injure the digital economy and prevent industry leaders from doing what the digital economy does best: Driving down prices and providing new generations of technology-based products that expand the productivity of the American economy and provide consumers with new generations of exciting and popular new products.” Just as in the 1970s, Laffer is not afraid to call out kneejerk advocacy for central planning and flawed federal “solutions.”

And, for continuing to call for pro-growth reforms even when it isn’t popular nor convenient to do so, Art Laffer is a Profile in Courage.