Contrary to Leftist dogma, Arthur Laffer is not a joke. This is the economist who was saddled with credit for what we call the "Laffer Curve." He himself attributed the insight behind it to the great Berber sage Ibn Khaldun, died 1406, arguable founder of many social science disciplines. He has also mentioned John Maynard Keynes among various older economists who got the point.
Let us briefly remind ourselves of this proposition of "Reaganomics," that has long been an object of ridicule among the progressive types.
If a government has a tax rate of zero, there will be no revenue. (I hope this is self-evident.) If it has a tax rate of 100 percent, there will also be no revenue: because there will be no private income, or at least, none willingly declared. Between those two extremes are tax rates that generate revenue. (Those who "have a problem with this" can stop reading now.)
The question is what rate will maximize it? And to that question, Laffer and any sane economist would admit a number of considerations. They may argue the comparative weight of these. But universal experience shows optimum rates are low, not high.
The underlying reason is plain. As tax rates rise, the return on additional effort diminishes. On the other hand, the effort to conceal income, or move it offshore, increases. A government might actually collect more from a lower rate than from a higher. But whatever that case, high tax rates grind down economic activity, and so are counter-productive across the board.
In a recent piece for the Wall Street Journal, this same Laffer predicts that the American economy will go into tailspin at a predictable date: Jan. 1, 2011. This is the day the Bush tax cuts expire, and U.S. rates return to much more destructive levels.
The New Testament Documents
15 years ago