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Arthur Laffer on income inequality, raising taxes
Arthur Laffer, the father of supply-side economics.
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Jeff Horwich: For the roots of today's Republican economic message, look to a small dinner in 1974. It included Dick Cheney, Donald Rumsfeld, and an economist named Arthur Laffer. As the story goes, Laffer sketched a curve showing how lower tax rates might actually increase government revenue. And the rest is history. The taste for so-called "supply-side economics" has waxed and waned, but it is now very much back in vogue.
Arthur Laffer was one of Ronald Reagan's top economic advisors, did a stint in academia, and now runs a research firm he founded. This morning, he's on Marketplace. Good to talk with you.
Arthur Laffer: It's good to talk with you, Jeff.
Horwich: I think it's fair to say -- correct me if I'm wrong -- that the one main thing you would like to see above all else is lower taxes, that that is a solution for a great deal of what ails us.
Laffer: Well what I'd love to see is lower tax rates and a broader tax base. It doesn't have to be a revenue-enhancer or revenue-loser, but you know, any major improvement would help the country enormously. We've got to get the job machine running again and get things really going.
Horwich: What's so wrong about raising taxes on this small segment of wealthy Americans, and lowering them or keeping them the same for other folks?
Laffer: The problem with raising taxes on rich people -- what they call rich people -- is rich people have many options open to them that other people don't have, and you won't get the money. You know, if you could get the money from them without costs, I'd love it. But you can't.
Horwich: Many economists will say the data is extremely inconclusive in practice as to how marginal tax changes actually affect personal and business activity. What makes you so sure?
Laffer: Because basically, these economists you talk about never worked in the real world. They're just looking at the econometrics and the data there. If you ever go and look at what's being recommended from the CPA firms, from financial planners. If you actually look at how they go through, do their tax returns -- believe me, they are more focused on their taxes than you and I are on their taxes.
Horwich: But am I right that I just heard you criticize economists for actually looking at the data and making their decisions based on that?
Laffer: No, no, not looking at the data. I think it's wonderful to look at the data. But I think it's really silly to look at this accurate data and not make any judgments beyond those aggregate data.
Horwich: But you're also arguing for a bit of common sense?
Laffer: Yeah, a lot of common sense. Even if you did get more money from the top 1 percent, it would be more than offset by the losses other people would not pay in taxes because these people aren't employing as many people, aren't investing as much, aren't buying as much. I mean, it's much more than just one little group.
Horwich: Many other economists left, right and center will point to various kinds of data that show income and wealth inequality in the U.S. are increasing, maybe the worst in many, many years. And yet, your center just put out a report claiming to debunk this narrative on income inequality. Are you saying that's not true?
Laffer: You know, this is a debate that's going to go on for years and years and years. I don't mind inequality if people are rising in incomes in all groups. I do mind equality when everyone's brought down to the lowest common denominator. You don't want to make the rich poor; you want to make the poor richer. These inequality specialists all around the place aren't proposing that. In all the quest to achieve less inequality, they are creating equality by lowering everyone. And that's silly.
Horwich: Economist Arthur Laffer, father of supply-side economics, with Laffer Associates, Laffer Investments and the Laffer Center. Good to talk with you, thanks.
Laffer: Very nice talking with you, Jeff.
Mr. Horwich, in response to your comments: Laffer's "view," as you indicate, is so fundamental to the alleged thinking of a major segment of our political economy that an exploration of its basis really deserves more time and depth. You might look into a follow up in which Laffer gets the opportunity to explain the underlying assumptions of his beliefs, and invite someone from another view (Krugman, Chomsky) to debate them. In other words, don't apologize for the format you work in, rather mold that format to provide what your listeners are truly concerned with. As for the substance of Mr. Laffer's epochal impact upon Republicans, I do not find Mr. Laffer's "judgment" to be anything more than "the rich are greed-driven." While this may be true, it's hardly an axiom upon which to build a democratic, pluralistic life-world.
I'm grateful for all of these responses to this conversation. Fewer than I might have expected given Laffer's fame/notoriety :-) but no doubt each of these responses stands in for many more listeners who found themselves holding their noses or shouting at their radios.
A few thoughts'-worth of context:
- Arthur Laffer is a provocative character (we rarely feature people who are extremely boring, for obvious reasons!). Part of our job is to grab listeners by the brain and inspire them to think through the competing ideas on the economy, including taxes and inequality. If he gets your goat, welcome to the very real and passionate debates that divide our country right now.
- I think there is some sense that when we (Marketplace, or public radio in general) engage a right-leaning thinker like Laffer, the only satisfying result would be an excoriating confrontation. Put aside, even, the question of whether this would allow us to even bring listeners diverse academic voices in the first place (and whether commenters apply the same standard when we explore the other side of the ideological spectrum -- see Kai's recent interview with Paul Krugman). To me the goal is different. The goal, as best we can in our short format, is to introduce listeners in a critical way to one of the thinkers who in many ways inaugurated the debate of ideas seizing economics, politics and policy right now. To this end, the ideal is a probing conversation that elucidates the heart of what Laffer is about, so listeners can add that to (or discard it from) their own informed opinions.
- That said, every question in this interview (with the exception of the opening one, and a short follow-up) is posed as a challenge, asking Laffer to respond to either the data or the prevailing wisdom that might disagree with him. If you want softball interviews with Arthur Laffer, you can find them; while it was respectful, this was certainly not one.
- It also bears mentioning that our interviews are recorded and then edited for the time available. If a point you would particularly have loved to hear me needle him on is missing, I apologize; the luxurious pace of Charlie Rose, we have not! In particular, I'd have liked to have spent much more time on income inequality. Our objective is to meet the goals above in the realities of our format.
- We are all free to love or hate his ideas. But Laffer is no armchair hack; he is an acknowledged and respected academic economist, whose insights are taught and discussed even by those who disagree with them. He's a person who matters -- arguably no modern economist save Milton Friedman matters more to large portions of this evenly-divided country. And Marketplace had not interviewed him before.
I'm an econ junkie; my list of hoped-for interviews covers left, right and in-between. One of the things that fascinates me about Laffer, in particular, comes across, I hope, in this short conversation: in many ways, most economists would concede he is largely right on the theory (the "common sense," if you wish) about what effects taxes have on individual behavior: less effort at working, more effort at avoidance/evasion (especially, as one comment here helpfully points out, if you have the resources to legally or less-than-legally redirect your income -- that's precisely the point). His "Laffer Curve" operates on a simple logic that is hard to deny. Few do.
But he embodies one of the great challenges for the economics profession and policy-makers: How should theory be tempered by data from the real world? And which data matter? The functional debate here -- and whether you buy supply-side economics or not -- involves where we "are" on the Laffer Curve, and whether it conveys all the crucial aspects of human economic behavior. Many economists look at actual measured data and simply do not see the common sense effects Laffer believes to be paramount. On the other hand, many of them and many of us can look in a more intimate way at the actual behavior of human beings we know (including ourselves) and know that we cannot ignore what most reasonable people will do in response to higher (or lower) taxes.
There's no easy answer, and thus we often use our values to fill in the blanks. This is where economics ends, and politics begins.
I thought I'd be brief, but it's Friday and apparently this is how I unwind! Have a great weekend, everybody.
I was struck in the interview, where Laffer said the following:
"No, no, not looking at the data. I think it's wonderful to look at the data. But I think it's really silly to look at this accurate data and not make any judgments beyond those aggregate data."
It sounds to me that Laffer has made the judgement to ignore the data! The whole point of carefully measuring the data is to test your judgements. I agree that it's reasonable to assume that taxes do have an effect on individual behavior, in your words, prompting "less effort at working, more effort at avoidance/evasion". However, who is to say how large these effects are and whether there are any counter effects? On my blog at http://usbudget.blogspot.com/2010/11/do-tax-cuts-raise-revenue.html , I quote page 115 of the book "The Coming Generational Storm", co-written by economist Laurence Kotlikoff which states:
[start of quote]
...For tax cuts to raise revenues, pretax labor earnings have to rise by a larger percentage than the tax rate falls.
There are two competing forces at play in determining whether pretax earning rise, stay the same, or fall. On the one hand, workers may say to themselves, "Boy, now that taxes are lower, I can work less and still receive the same after tax pay. I'm going to cut back my workweek." On the other hand, they may say, "Boy, now's a good time to work more and earn more because taxes are lower on every extra dollar I earn". Economists call the first of these reactions the income effect. They call the second reaction, the substitution or incentive effect.
Some of the best labor economists in the country have spent their lifetimes measuring the income and substitution effects. The broad consensus of these experts is that the two effects are roughly offsetting. This means that if wage tax rates are cut by, say 15 percent, tax revenues will fall by 15 percent.
[end of quote]
Only be looking carefully at all of the data, can one test one's judgements and make sure that one is not misjudging an effect or missing counter effects. I did that to the best of my ability in the article at http://www.econdataus.com/taxcuts.html . For years, I've asked supply-siders to tell me any specific numbers or conclusions in my analysis that they disagree with. Alternately, I've asked them to post a link to one serious economic study that purports to show evidence of any income tax cut that has ever paid for itself. None have. So, until someone can provide me with a study or arguments that counter this analysis, I'll just have to stick with the data.
Yeah, that'll solve it. Trickle down economics seems to be the real key to success. I seriously cannot imagine a scenario where my employer would take the increase to their bottom line and turn around and say 'hey, we have all this extra money....should we give it to the shareholders (already rich enough, no?) or should we give all our employees a raise?'. I'm thinking the shareholders win out in this scenario leaving nothing for me. Just my opinion though.
*pinches bridge of nose* This... this interview. This is why we can't have nice things. This is why there is an income inequality, and why the rich get richer and the poor get poorer. Because people ignore, discredit, and mock the actual cold hard facts in favor of their own whimsy.
It's amazing how the supply-side gang and neocons (in foreigh affairs) consistently get it wrong yet continue to spew out misinformation. It is equaly amazing how reputable journalists fail to call them on these facts. Tax increases by Bush 1 and Clinton resulted in the largest decade of job growth in 30 years and resulted in a government surplus. Meanwhile, supply-side (voodoo economics) consistently has resulted in enormous government deficits. Under Bush 2, job creation was anemic. How you can allow Laffer (or is it Laughter) make such assertions that small tax increases on those earning over $250,000 (they still get a tax cut up to this income limit) will desstroy our economy, when facts and recent history point out otherwise, is baffling. The rates proposed under Obama will still be lower than during the Reagan years, yet one would think he is soaking the rich! The propaganda machine that supports the big banks and 1 percenters is relentless in their spewing of false information in support of a failed ideology. How the press can allow this shameless behavior to continue is puzzling. (And if you listened to Romney's address before the VFW earlier in the week, the neocons are back at it all over again. Get ready for more wars should Romney get elected.)
In his interview with economist Arthur Laffer, reporter Jeff Horwich missed an incredible opportunity to get to the heart of our nation's political divide when Laffer asserted, "rich people have many options open to them that other people don't have" with respect to paying taxes. The follow-up question should have been "is is fair that ordinary people don't have these same options?"
