Latest / The Capitalism and Freedom in the Twenty-First Century Podcast / Art Laffer on Tax Policy and the 50-Year History of the Laffer Curve | Hoover Institution

Transcript

Art Laffer on Tax Policy and the 50-Year History of the Laffer Curve | Hoover Institution · The Capitalism and Freedom in the Twenty-First Century Podcast

0:00
[MUSIC]
0:08
>> Jon Hartley: This is the Capitalism and Freedom in the 21st Century podcast,
0:11
an official podcast with the Hoover Institution Economic Policy Working Group,
0:14
where we talk about economics, markets, and public policy.
0:17
I'm Jon Hartley, your host today.
0:18
My guest is Arthur Laffer, a legendary economist who is the famous namesake and
0:22
popularizer of the Laffer Curve,
0:24
which depicts the relationship between tax rates and tax revenue.
0:28
On top of Art's career in academia, he's also an investor,
0:31
having founded Laffer Investments and has advised countless
0:34
politicians from Richard Nixon working in the Nixon administration,
0:38
to Ronald Reagan working in the Reagan administration,
0:41
working on Reagan's Economic Policy Advisory Board, and most recently working
0:45
with President Trump, who awarded Art the Presidential Medal of freedom in 2019.
0:50
Welcome, Art.
0:51
>> Arthur Laffer: Thank you very much.
0:52
Jon, it's so nice to see you again.
0:55
>> Jon Hartley: So great to see you as always.
0:57
And I really am excited here to talk to you because I know you well and,
1:02
and I really want to, I think, shine a light on,
1:07
on your early life and, and all your incredible accomplishments.
1:13
You know, you, I'm curious, you know, how did you first get interested in economics
1:18
and how did you make your way to Yale and then to Stanford to do your PhD in
1:22
economics and study under the famous international economist Ron McKinnon?
1:26
I've actually, I've seen your PhD dissertation here.
1:30
We have a room with all the PhD dissertations of past Stanford students,
1:35
and I've seen yours in this room of many red books with all the dissertations.
1:40
I'm curious, what was it like when you were here and
1:43
how did you actually get interested in economics in the first place?
1:47
>> Arthur Laffer: Well, it was really cool.
1:48
I got interested in economics.
1:49
I went to the University of Munich.
1:50
I took a year off from Yale, by the way.
1:53
I got into Yale by privilege.
1:54
My dad went there, both my brothers went there.
1:57
We are a Yale family.
1:58
So it was natural, just sort of inherited thing there.
2:02
And I took a year off at the University of Munich,
2:05
where I had been a math major at Yale.
2:07
And I got to Munich and they didn't have any math courses I hadn't had.
2:10
So I decided to try [FOREIGN] which is macro and microeconomic.
2:16
I fell in love with it, came back to Yale, changed my major, was an economist there,
2:20
majored in it, cleaned up, hit the ceiling,
2:23
then went to Stanford Business School.
2:26
You know, family's business.
2:27
My dad was head of a large company in America for many years.
2:30
Privileged family, all that.
2:32
And I fell in love with economics.
2:34
I took all these courses.
2:36
I took my core exams in the econ department when I was in
2:39
the business school.
2:40
I was the only student to do that out of something like 200 students.
2:44
And I aced them.
2:45
So I switched over and I got my Ph.D.
2:48
in economics after my MBA and, and then I went to the University of
2:52
Chicago where I took my first year as a year's leave of absence to go to
2:56
Brookings Institution with Emile de Pre, who was a professor at Stanford.
3:01
And well, you know, it's all written in the stone from there on my career, but
3:06
it's.
3:07
I love Stanford, I love the business school and
3:09
I love switching into the econ department.
3:11
And Ron McKinnon was spectacular, as was Emile Deprez, by the way.
3:17
You know, we had a big good group of international economists back then, and
3:22
that's my specialty, pure trade and international money.
3:26
And they were really terrific.
3:28
And I got my first publication in the AER before I entered graduate school
3:32
in the economics department.
3:34
How's that?
3:35
>> Jon Hartley: That's amazing.
3:37
>> Arthur Laffer: In fact, my first publication was in Reagan's
3:40
first economic report of the governor in 1967.
3:45
That's my first citation.
3:47
So how's that for cool?
3:50
>> Jon Hartley: That's amazing.
3:52
Okay, so I guess a few questions.
3:54
So like, Ron McKinnon, for those who don't know.
3:57
Ron McKinnon, you know, famous international economist,
4:00
spent most of his career at Stanford.
4:03
You know, I think, you know, maybe like a 50 plus year career.
4:06
And he was famous for coining financial repression, focused on China a bit later.
4:12
I mean, I'm curious what, what it was like at that time.
4:18
I, I mean, I, my sense is like, you know, Stanford's I always think of as.
4:22
It's the sort of department that Ken Arrow and others built or
4:25
it's kind of the environment that Ken Arrow and others built.
4:28
But I'm curious, what was it like, you know, at the business school at the time?
4:32
What was it like doing the MBA and segueing into PhD?
4:36
Strangely, I also sort of have an MBA, and finishing a PhD and all that as well.
4:41
But I'm curious, what was that like in California at the time?
4:44
I mean, Governor Reagan in California, what was California like?
4:50
>> Arthur Laffer: Well, he wasn't quite there yet.
4:51
I mean, remember I came in 63 and Reagan didn't take office until 67.
4:56
So the first part was still under Edmond G.
4:59
Pat Brown there.
5:00
And it was a very exciting, very.
5:03
I don't know what it's like today in the courses, Jon.
5:06
I don't.
5:07
But at that time, Stanford was extraordinarily rigorous mathematics.
5:12
Ron McKinnon was no BS period.
5:16
He, he had me do proofs and theorems there I was worked for Moses Abramovitz.
5:22
I was the proofreader for why Growth Rates Differ by Ed Denison.
5:26
So this is the detailed numerical stuff and detailed mathematical stuff.
5:31
So we worked in statistics and math very, very heavily at that time.
5:36
And I, I think it softened a great deal to be honest with you, at Stanford.
5:41
But we came out of there, we were, >> Jon Hartley: they let me in.
5:44
Clearly that, you know.
5:44
>> Arthur Laffer: Well, you know, it's, it's not who they let in,
5:47
it's who they let out that's important.
5:50
And I am sure you're going to be let out a better man and a better economist as.
5:54
But that time you really had to be rigorous and
5:57
McKinnon was as rigorous as anyone was.
6:00
Emile Desprez was the love of the century.
6:02
I mean I just love that man more than anything.
6:05
Ken Arrow was, was an important part of the department but he was separate.
6:08
He was in Whatchamacallit Hous, Sarah House,
6:12
which was where Ken Arrow and the mathematical commons.
6:16
We were all in Encina hall there, the whole group of us,
6:19
which you probably don't even have anymore.
6:22
The business school wasn't built.
6:23
We were all a history corner, but it was two very different things.
6:28
And I had very little interaction with Ken Arrow.
6:32
A lot of interaction with McKinnon,
6:35
with Emile de Pray, with Paul David Paul Holmberg.
6:39
A good group of solid economists there.
6:42
I just loved it. Just loved it.
6:44
>> Jon Hartley: That's fantastic.
6:45
And my understanding is I think some of the mathematical economics Ken Arrow sort
6:48
of grew out separately.
6:49
I mean we have the MSC department as well, which is all separate.
6:52
So there's all these different, different groups of economic scholars or
6:57
economics related scholars here and between certainly in these times
7:02
we've got Hoover and we've got the Stanford Economics department.
7:07
There's CEPA, we've got the business school.
7:12
There's also the political science departments, FSI, which is just foreign
7:16
policy, and all these folks are doing economics to some degree.
7:19
I'm curious.
7:20
I guess HP has always I think been one of those big,
7:24
I think founding sort of companies, if you will, in the area.
7:30
I mean, was the tech sort of, was this [INAUDIBLE] at the time or not?
7:35
>> Arthur Laffer: My job when I was at Stanford, I was, you know, very young.
7:39
Obviously, I came and I was married.
7:41
Most people were not.
7:43
I had a baby, so I had a family and so I worked at night.
7:47
I was night watchman in Shockley Transistor and
7:50
1800 Page Mill Road which was the opening one that was before the group left and
7:57
formed their new company there Before all the deserters left Shockley.
8:02
So I was night watchman there.
8:05
So yeah, we were really big on that.
8:06
In fact, Shockley asked me to be his research assistant in the university.
8:12
And I told him I really didn't have time to do that.
8:14
I could as night watchman, I could do all my homework there, four hours every night.
8:19
And he wanted me to come in and actually be a real serious research assistant and
8:23
do this genetics research.
8:25
Thank God, I didn't do that [LAUGH] just what I need is another scar on my back for
8:30
whatever conservative stuff these guys do.
8:35
>> Jon Hartley: Great.
8:35
Well, okay, so did you know anyone in the early, like any of the early
8:40
Reagan people who are in California and advising him at that time?
8:45
Do you cross paths with any of them >> Arthur Laffer: later on?
8:47
I did, very much so.
8:48
You know, my godfather was Justin Dart, who was Reagan's best friend.
8:51
And so my relationship with Reagan was strictly familial, was privileged.
8:56
Was all of that.
8:58
When you're someone's best friend, you get intersect in the circles.
9:02
And so when I came back to California in 76,
9:05
I was immediately in the social set with Reagan.
9:09
When Bob Hope died, for example, I was the escort for Dolores Hope and
9:14
all of us in the Beverly Hills, Bel Air, that era, Palos Verdes,
9:18
Rolling Hills, that was mine as I was the kid and all of that.
9:23
So that's how I really got to be superly close with Reagan and
9:26
all the people around Reagan.
9:28
But I knew them all really, really well and doing a lot now with it.
9:32
>> Jon Hartley: Terrific, terrific.
9:33
Okay, so California,
9:35
your first job coming out of Stanford was at UChicago University Chicago.
9:41
>> Arthur Laffer: First, yeah.
9:42
Job, yes.
9:43
But I took a leave of absence my first year out and I went to Brookings.
9:47
At Brookings, And then I came back to Chicago where I'd never been before.
9:52
>> Jon Hartley: And I know you later taught it at USC and Pepperdine as well.
9:55
I'm curious what was like the UChicago this would have been I guess in the late
10:00
60s, early.
10:01
>> Arthur Laffer: 60s, 70s that era, I came back for one year,
10:06
my second year on the faculty, my first year in location.
10:11
I was pretty lucky I got a lot of published articles in the top journals
10:15
everywhere at Aerial, all of these things there.
10:17
And so I think I got the fastest promotion to tenure at Chicago in their
10:22
history in econ.
10:24
Promoted a tenure and then George Schultz in 1970 asked
10:29
me to go to the White House with him as his right hand person.
10:34
So I was the top staff economist in the White House from 1970 to 1972.
10:40
And the first in the first year of the Office of Management and Budget.
10:45
It had been the Budget Bureau before.
10:47
But when Schultz came over and took it over,
10:49
he changed it to the Office of Management and Budget.
10:52
And I was his choice.
10:54
My first thing before I even got my office was to go to China with him and
10:58
John Ehrlichman and made the first trip to China.
11:01
So I was the first American in modern times at least to go to China in October
11:05
of 1970.
11:06
And it was just all cool stuff.
11:08
I mean, just amazing, I had no idea how cool it was until later.
11:12
>> Jon Hartley: It's amazing.
11:12
And you know, I think a lot of people don't necessarily appreciate, you know,
11:16
Schultz as, you know, Treasury Secretary.
11:19
I think he's tied with, I think, the most number of counter appointments.
11:22
And >> Arthur Laffer: yes, he was
11:24
>> Jon Hartley: obviously a big, you know,
11:26
a huge influence here at Hoover.
11:30
But, you know, I think that some of the things that I think people don't really
11:34
appreciate, you know, this about that time and what was going on was on,
11:38
on the sort of the treasury side of things was, you know, I think, you know,
11:43
the creation of what was, you know, the predecessor to the G7.
11:46
You know, we have all these G7 meetings today.
11:49
I think that was very much created out of the Schultz treasury at that time.
11:52
>> Arthur Laffer: Well, that was before Schultz treasury that I'm talking, here he
11:55
was head of the Office of Management, but his first job was Secretary of Labor.
11:59
And then when he moved over to be head of the Office of Management and Budget,
12:03
this newly created agency is when I joined him in nineteen nineteen seventy.
12:07
Now at that time was just before the Camp David wage and price controls,
12:11
devaluation, the dollar, the 10 import tax surcharge.
12:15
All the stuff you and I hate and despise and disagree with to the limit.
12:19
But Nixon, I enjoyed Nixon personally very, very much.
12:23
But this was George Schultz's first thing there.
12:26
And then of course, what he did was he left that.
12:29
He went become Secretary of the treasury.
12:32
And I went with him for that.
12:33
I was his consultant two days a week from the University of Chicago.
12:36
I went in there and I had my own little office right next to his,
12:39
right across the little hall there.
12:41
And it was just a cool, cool time.
12:43
That's when we went off gold, when we devalued the dollar.
12:46
We did all the Smithsonian Accord.
12:49
All of that stuff occurred in that period.
12:53
And it was a very exciting period.
12:55
A very, in my way, bad period in sense of economics.
12:59
I mean, you know, it's when government finally monopolized money as you know,
13:04
Jon, before 1913, money was private.
13:08
There was no government money.
13:09
Now, the government did do three things.
13:12
It defined what a dollar bill, a dollar was.
13:14
It's 1/20 of an ounce of gold, it's 1 ounce of silver.
13:18
You know, that's what they defined that.
13:21
Then the government also, prior to 1913, did have a mint that minted coins.
13:26
If you brought in bullion, it minted coins correctly and charged a fee for it.
13:31
So did a lot of other places mint coins.
13:33
And the third thing the government did which was really important was that
13:37
it audited banks balance sheets.
13:39
So if you said your balance sheet and your income statement was such,
13:42
they went in and audited it and made sure it was true.
13:44
And what was before 1913?
13:47
There was no currency as we know it.
13:51
There was banknotes which were issued by individual banks.
13:55
Some sold a slight discount or premium to another bank or so, but
13:58
that was the money back then.
14:00
And obviously from 1790 until 1912, let's say the US had bibbles and
14:05
bobbles and inflation, but there was no generalized inflation for 130 years there.
14:12
And then, of course, once we started the Fed, which was in 1913,
14:16
the government started to monopolize money.
14:18
Then Roosevelt devalued the dollar from $20.67 an ounce to $35 an ounce,
14:24
ba, ba, ba, ba.
14:26
Interest equalization tax, voluntary, ending up in the Smithsonian.
14:30
In the next 120 years or so, we've had huge inflation,
14:34
I think the price levels increased 33 fold.
14:37
It's just another example how government shouldn't be in the business of doing what
14:41
the private sector does better.
14:43
There should be no government money.
14:45
There should only be private money today.
14:48
And it should not be, it should not be run by Powell.
14:53
I mean, what, I mean, this guy's not competent.
14:57
Government shouldn't run money, it should be private.
14:59
>> Jon Hartley: So I will get into my- >> Arthur Laffer: I got you to a different
15:03
field, didn't I, quickly?
15:05
>> Jon Hartley: I know. So I guess this is my,
15:06
my question for you.
15:07
So, you're working at UChicago.
15:11
You're working at OMB.
15:12
You know, you're working with Schultz, you know, going back and
15:15
forth between Washington, you were there, Chicago in the late six.
15:19
And around that time, you're hired as an international economist.
15:23
>> Arthur Laffer: Yep.
15:24
>> Jon Hartley: And I'm sure at that time you, you, my,
15:26
my guess is you're probably in the same seminars as Harry Johnson.
15:29
You know, the famous >> Arthur Laffer: Bob Mondell was
15:31
the best, was the leading international economist of the world.
15:34
Back then.
15:35
I worked with Mondel, it's the Mondel Laffer hypothesis.
15:38
All the stuff we worked together.
15:39
He was my primary thing, very big fan of Ron McKinnon's, both of them Canadian,
15:44
both of them the same economics.
15:45
He loved my training with Emile D Perry and Ron McKinnon, and
15:49
we did tons and tons of work together.
15:51
He took- >> Jon Hartley: All three of them were
15:53
Canadian?
15:53
Robert Mondell was Canadian, Harry Johnson Kane, Ron McKinnon.
15:57
>> Arthur Laffer: Yeah.
15:57
>> Jon Hartley: And some people would argue that, I mean, part.
15:59
Part of what, you know, inspired the Mundell Fleming hypothesis or conjecture,
16:05
you know, and trama was you, the fact that Canada was actually the first sort
16:10
of break off from the Brenwood fixed exchange rate system in the 50s and
16:15
to float briefly before they, they went back, almost got killed.
16:20
And that sort of influenced Mondel to start thinking about, you know,
16:23
should we have a fixed exchange regimen?
16:25
Floating exchange rate regime.
16:27
Mundell and Milton Friedman had obviously this you know, very big debate in,
16:30
in that time.
16:31
>> Arthur Laffer: Well, we were all, we were all fixed exchange rates.
16:33
We were gold, gold standard people.
16:34
Mandel and I and Paul Volker in there and Milton Friedman was floating rates.
16:38
And you know, just for the record, floating rates don't work.
16:41
They don't work.
16:43
>> Jon Hartley: It's a debate that still goes on to, to this day.
16:46
>> Arthur Laffer: Yeah, but it shouldn't.
16:48
>> Jon Hartley: Yeah, well, I mean, you know the, the, you know, the end I guess
16:51
of Bretton woods and, and the breakdown of the fixed exchange rate system.
16:54
You know, it's ushered in.
16:56
>> Arthur Laffer: This fixed exchange rate system didn't break down.
16:59
The fixed exchange rate system was demolished by sabotage.
17:02
>> Jon Hartley: Yeah, >> Arthur Laffer: we had no problem with
17:04
a fixed rate system for three, four centuries before 1913.
17:08
It did really well and the monopoly of government and
17:12
then floating rates did really badly post 1913, and
17:17
it ended up squirrely as all get out.
17:20
We almost went back to fixed rates with Reagan.
17:22
We came very close.
17:23
>> Jon Hartley: Well, there was the gold commission in a Schwartz kind of lad and
17:27
there was a bit of a revisiting of some of these things.
17:30
>> Arthur Laffer: A total revisiting.
17:31
And Reagan was a hard money person as was Paul Volcker.
17:34
Paul Volcker was gold standard all the way.
17:38
>> Jon Hartley: He, I mean Volcker wanted zero to his, you know, for
17:41
his entire life wanted a 0% inflation target.
17:45
>> Arthur Laffer: Me too.
17:45
Me too.
17:46
Mandel too.
17:48
>> Jon Hartley: I guess there was why 2% over long periods of time.
17:50
It's a lot of inflation.
17:51
But you should have 0% said was the argument, I mean,
17:56
was it Friedman who was pushing back for
17:59
flexible exchange rates and who won over Reagan in that?
18:03
>> Arthur Laffer: It was 100% Friedman through George Schultz that got
18:07
the Camp David to go to floating, go, you know, devalue the dollar, go off gold and
18:11
to have the Smithsonian Accord where you had a floating rate 100%.
18:16
Milton Friedman.
18:17
Now there were a lot of other economists who agreed with him, but he was the push.
18:20
He was the one with George, who convinced George to get in there and, and, and
18:25
get the President to go along with it.
18:27
And you know, I was, I differed with him on that very much so to express it.
18:33
But George was the most wonderful person in the world.
18:35
You know, he could, you could disagree with George or
18:38
whatever without being disagreeable.
18:40
And as his staffer, the only thing I always wanted was that he listened to me,
18:44
not that he agreed with me.
18:46
I was never elected to make decisions.
18:49
I'm only there as an advisor, the same way I am with Trump,
18:52
the same way I was with Reagan, by the way.
18:54
I'm only there as a buyer.
18:55
You make the decision, but as long as you listen, I'm fine with you.
18:58
And that was the same thing was true with, with Nixon.
19:01
I disagreed with almost everything Nixon did.
19:05
Devaluation, going off cold, tax increases, you name it,
19:09
wage and price controls.
19:11
I mean, but there wasn't a thing Nixon did that, that I did.
19:14
But I like Nixon very much.
19:16
Personally. I love George Schultz.
19:17
>> Jon Hartley: Yeah, I mean, Nixon arguably,
19:19
I think one of the smartest presidents that, that we've had, you know, the,
19:23
all sort of policies and, and other activities aside.
19:27
But, you know, I, I guess the Freedman argument for
19:30
flexible exchange rates was, if you have PPP, if you're fixing exchange rates,
19:35
then it kind of allows prices to jump out of whack.
19:38
And, and I guess this.
19:39
Anyway, >> Arthur Laffer: so that's all.
19:42
How do they get out of whack between Chicago and Cleveland?
19:45
That's a fixed rate system, isn't it?
19:47
Now, how about between California and New York?
19:51
Or they out of whack?
19:52
California should devalue.
19:53
Come on.
19:56
>> Jon Hartley: Optimal currency area.
19:57
>> Arthur Laffer: Well, you know, the optimal currency area was a, was,
20:00
was the one about Canada, the West versus the East.
20:03
What Mondell really pushed for very much was a currency area and
20:07
a common currency area, which he put to Europe.
20:10
That wasn't an optimal currency area in Europe.
20:12
It was the euro that he thought should be the total currency.
20:16
And that then that should be juxtaposed against the dollar, maybe against the yen,
20:21
whatever.
20:22
But Mundell was very much the fixed exchange rates.
20:25
If you see his article, to mine was two arguments for fixed exchange rates.
20:30
And his was the case for fixed exchange rates.
20:34
We did all that stuff.
20:35
Mandel was very much in that line.
20:37
>> Jon Hartley: Right.
20:38
Influenced the creation of the euro.
20:40
I mean that, you know.
20:41
>> Arthur Laffer: Well, that is what.
20:41
Getting rid of floating rates.
20:43
>> Jon Hartley: Exactly.
20:44
>> Arthur Laffer: Thank God.
20:45
And he was right.
20:46
He's been right on all of these things.
20:48
And we're still pushing to get, get back to a Sound monetary standard.
20:52
And that's why the euro, that's why Bitcoin is doing so well.
20:56
That's why gold is so high priced.
20:57
Everyone wants to get out of government money.
20:59
So they just are crap things and they want a private money system back again,
21:04
one money system for the world.
21:06
>> Jon Hartley: So, I guess the question,
21:08
how did you become a tax accountant of all this?
21:11
You know, you're international coming out of, out of graduate school, you know,
21:15
obviously your money and, and all these things front and center in the late 1960s
21:19
and you know, hanging out with Mondell and urban colleagues, with Mondell and
21:22
all these other, you know, freedmen and so forth.
21:25
You know, how did was tax policy always.
21:30
>> Arthur Laffer: It's like getting a virus,
21:31
it's like getting the bacteria in your system comes and eats you alive.
21:35
You know. I was the chief
21:37
economist at the OMB when it was formed in the White House.
21:39
So there I, as far as credentialed economists,
21:42
I was the ranked number one there in the White House.
21:45
The Council of Economic Advisors was over in the old Executive Office Building
21:48
and it was.
21:49
And you're immediately involved in all policy matters.
21:53
And I developed a little model that are called the formal model of the economy
21:58
which was published in the Journal of business in 1972 I think it was.
22:03
And there I did a test of the monetarist model,
22:06
the Keynesian model and the efficient markets model.
22:09
Back then we didn't have supply side and I got into some real deep trouble.
22:14
Government spending using a seasonally unadjusted co adjusted.
22:18
You can go back and look at the article there.
22:19
It created huge, huge kerfuffle in the world.
22:23
If you go back and look at the article there,
22:25
I found that government purchases of goods and services increased GDP by the amount
22:29
of the increase in purchases of goods and services in the first quarter and then for
22:33
the next three quarters went back down to where it otherwise would have been.
22:38
So it was 100% crowding out of shifting government for there.
22:41
And I couldn't understand that.
22:43
And government transfer payments actually reduce GDP growth.
22:48
So I was struggling with this, being trained as a macroeconomist back then.
22:53
I, I was struggled with this terribly and, and
22:56
finally came to the conclusion it's incentives and supply.
23:00
If you tax people who work and you pay people who don't work.
23:07
Do I need to say the next sentence to you, Jon?
23:10
No.
23:11
That was supply side economic Government spending reduces output, not increases it.
23:17
Taxes are a disincentive to work output and
23:19
employment transfer payments pay people not to work, they tax people who do work.
23:24
And that was the evolution of supply side economics,
23:27
which is the exact opposite of Keynesian or monetarism.
23:31
I am not a monetarist at all.
23:33
I'm not a Keynesian.
23:35
I personally believe that people don't work because their jobs.
23:40
I believe that people work to get paid and they get work to get paid after tax.
23:45
I don't believe that people save their money because of income,
23:48
incomes being higher.
23:50
I believe they're save their money to make an after tax rate of return on their
23:54
investments.
23:54
Hello.
23:55
It's an incentive based model.
23:57
I believe that if you have two locations, A and B.
24:01
If you raise taxes in B and you lower taxes in A,
24:04
producers and manufacturers are going to move from B to A.
24:08
You know, people can change the location of their income,
24:11
the timing of their income, the volume of their income and
24:15
the composition of their income, all based on taxation.
24:18
And that's came out of my paper in 1972.
24:21
And I was at sixes and nines.
24:25
I was completely at odds with my own concept until all of a sudden this
24:29
classical model started rolling in on me and bang.
24:33
And then you can see all the rest from that.
24:35
Mundell was right there with me the whole time.
24:39
It was just a great, great fun.
24:40
And that's why now I spend so much time on macro.
24:43
It's just. It's just incentive economics, Jon.
24:46
That's all it is.
24:47
I mean, nothing more, nothing less.
24:48
Just like international economics.
24:50
>> Jon Hartley: Absolutely.
24:51
You know, and it's fascinating.
24:52
I think there's now, you know, we're 50, roughly 50 years later.
24:57
You know, I think there's, you know, whole renaissance going on in,
25:01
in fiscal research and, you know, a lot of work done by Valerie Ramey here and
25:06
work done by John Taylor as well.
25:08
You know, just showing that fiscal multipliers are much smaller than people.
25:12
I think originally >> Arthur Laffer: they don't exist.
25:13
They're negative.
25:14
They're negative, Jon.
25:16
They're negative.
25:16
Negative.
25:17
You know, have you ever heard of an.
25:19
Of a person spending himself into wealth?
25:21
It's stupid.
25:23
Have you ever heard of an economy taxed into prosperity?
25:26
It makes no sense.
25:28
Now, there are certain functions the government does that it does better,
25:31
like military and stuff like that.
25:33
We're not talking about that.
25:34
We're talking about transfer payments.
25:36
We're talking about that.
25:37
And let me, if I Can I go through with.
25:39
One second with you on the transfer theorem, because this is, this is so
25:43
important, Jon.
25:44
You know, the transfer theorem is that all
25:47
transfers are where you take income from one group and give it to another group.
25:52
That's a transfer.
25:53
We usually think of it in terms of from those who have a little bit more to those
25:57
who have a little bit less.
25:59
You with me now.
26:01
If you take from those who have a little bit more and
26:03
give to those who have a little bit less.
26:06
By taking from those who have a little bit more,
26:08
you reduce their incentives to produce, and they will produce a little bit less.
26:14
By giving to those who have a little bit less, you.
26:16
You provide them with an alternative source of income other than working, and
26:21
they too will produce a little bit less.
26:23
The theorem here, and it's a theorem it's not my opinion.
26:27
It's not.
26:28
I'm tall, I'm short, I'm Harvard, I'm.
26:30
It's math.
26:31
Whenever you redistribute income, you always reduce total income.
26:35
And that's the whole basis of stimulus spending is redistribution of income.
26:39
And it doesn't work.
26:41
It always reduces income.
26:42
>> Jon Hartley: I mean, my sense is that having looked at a lot of say,
26:46
myself as well, and this is the arguments that, you, John Taylor and
26:50
Valerie Raymond there's made is that really the challenge with transfers is
26:55
that they largely get saved and they don't get spent.
26:58
So you know, this idea that like.
27:00
>> Arthur Laffer: People, that's, that's wrong.
27:03
Let me just say the problem with transfers is they have to be taken from
27:06
someone else.
27:07
>> Jon Hartley: Well, that's true too.
27:08
I mean. >> Arthur Laffer: No, no, no,
27:09
that's not true.
27:10
That's not true too.
27:11
That is all that's true.
27:13
You know, by taking from people who have, you reduce their spending because they
27:18
now have less than they otherwise would have had,
27:21
that will destimilate the economy in the same way.
27:24
The people who receive the money will spend more,
27:27
the recipients of transfer payments will spend more.
27:31
That's true.
27:31
But the payers of transferred payments will spend less.
27:34
The income effects.
27:35
Get your Slutsky equation out.
27:37
This is where training today is.
27:39
Get your damn Slutsky equation out.
27:41
In a, in an economic system, these income effects always, for
27:46
a transfer or a tax rate change, always.
27:49
Sum to zero, always.
27:51
But the substitution effects don't.
27:53
I had this problem with Senator Nelson in 1974 when he, when we were talking
27:58
about the 600 buck tax rebate from Jerry Ford by the, that guy.
28:02
And you know, I was trying to explain the substitution effects to the Senator, and
28:06
I couldn't find it.
28:07
He said, you know, and I was on the, is testifying with Gardner Ackley,
28:11
Paul McCracken and Otto Eckstein, okay?
28:13
They were the three senior grown up economists who really wanted to do this
28:17
transfer.
28:18
And finally I said to, to the Senator, I said, sir,
28:21
if those three economists are correct, that $600 stimulus will increase output,
28:26
employment, production, what the hell's the matter with you?
28:30
Why only $600?
28:31
Why not 6000-6000-0600-0006.
28:34
Why not 100% of GDP?
28:37
So everyone who produces and works receives nothing.
28:41
And all those who don't work and don't produce, receive everything.
28:44
What do you think would happen to gdp?
28:47
And he goes, God, >> Jon Hartley: probably not much.
28:49
>> Arthur Laffer: It would go to zero.
28:50
And that's right.
28:51
And these guys just don't get, they don't understand straight up from Sikkim,
28:56
a transfer system ala Keynesian is you take from someone and
28:59
their spending goes down.
29:01
You give to someone else, their spending goes up.
29:04
That's true, that's a zero-sum game.
29:07
But the substitution effects make it a huge negative sum game.
29:11
And that's what is.
29:12
And that's why the transfer theorem is so true.
29:15
Every time you transfer resources, you reduce total production.
29:18
Period.
29:20
Sorry, Jon.
29:21
>> Jon Hartley: No, I'm, I'm, I'm with you.
29:22
I mean on incentive, the facts.
29:23
>> Arthur Laffer: Get that Cogan guy and
29:25
get him on here TV with me get them all on here.
29:29
Let's go to, let's have a good me out there to Hoover and do a debate.
29:35
And redistribution is the same silly thing.
29:37
These guys at MIT Science and Piketty and Sanchez and all those, whatever,
29:43
you know, everyone knows that the only way of having equality and
29:48
income is when everyone's zero.
29:52
That's, that's the transfer theorem in the limit function.
29:55
And everyone knows the data show that every time we've raised the highest tax
29:59
rate on income earners.
30:00
Every single time, Jon, the economy's underperformed,
30:03
tax revenues from the rich have gone down and the poor have been hammered.
30:07
Every time we've cut tax rates on the rich, the opposite,
30:10
the economy has outperformed.
30:11
Tax revenues from the rich go up and the poor have been provided employment and
30:16
good income earning opportunities.
30:18
>> Jon Hartley: I don't think you get much disagreement from folks.
30:21
And as you point out, John Cogan has an excellent book,
30:24
the High Cost of Good Intentions, which is excellent.
30:27
>> Arthur Laffer: Why don't you look at taxations?
30:28
Taxes have consequences.
30:30
I looked at every single tax return in the US we have the data.
30:34
If this is not an opinion piece, I could give a damn what your opinion or
30:37
anyone else's opinion is.
30:39
And you should give a damn about mine.
30:40
This is about facts, not how you feel.
30:43
And the facts are whenever we raise tax rates on the rich,
30:45
the economy underperformed.
30:47
Whenever we lowered them, it outperformed.
30:49
Revenues exact same, and the poor.
30:51
Bingo.
30:52
What more do you want?
30:54
>> Jon Hartley: So I, I just want to get a little bit into just the history of how
30:57
black became famous, because I.
30:59
I think this is a long story, you know.
31:01
>> Arthur Laffer: Became obnoxious and then famous for being obnoxious first.
31:05
>> Jon Hartley: Wells, a lunch in 1974, Ed Atkin, Dick Cheney,
31:08
Don Rumsfeld, then chiefs of staff to President Ford,
31:11
Jude Wanniski, legendary Wall Street Journal journalist.
31:14
I'm curious.
31:15
I want to hear sort of the, I guess, the backstory, how you tell the story.
31:18
I mean, how long were you thinking about, you know, sort of the the LA curve,
31:23
thinking about drawing the the relationship between tax revenue and
31:27
tax rates?
31:30
Were you planning on, was the pitch plan, was a planned thing, or
31:34
was it unexpected that you were going to draw this?
31:38
>> Arthur Laffer: Let me tell I've been teaching my classes on the Cobb Douglas
31:42
production function, called the CLO model,
31:45
which I developed long before I told you how I was frustrated.
31:49
And then I did the the model where I had six factors, six unknowns, and
31:52
solve the systems there and showed all the different things there.
31:56
And one of the things was that if you raise tax rates on a factor of the.
32:00
Production, the returns there, you reduce that factor's employment, you reduce other
32:04
factors employment because they're withdrawing the complementarities out.
32:08
And sometimes revenues go up and sometimes they don't.
32:11
You can overtax a factor, you can undertax it.
32:13
It's like any product in the marketplace, if you tax something too much,
32:18
you're going to get less tax from that and tax too little less and
32:23
having dinner with them and they just done the whip inflation now,
32:28
which was a 5% tax surcharge.
32:31
Jerry Ford's brilliant, incredibly insightful idea, just stupid as it comes.
32:39
And I was telling my classmate, Dick Cheney was my Yale classmate and
32:42
Don Rumps were one of my best friends.
32:44
I said, you know, you guys, you may get 4% more revenue,
32:48
you gave me 3% more revenue, but you won't get 5% more revenue.
32:52
And in fact you may lose revenues, and then I went through and just did what I
32:55
did for my class, which showed that you're over tax, you're gonna get less revenues,
32:59
you under tax, you, you'll get less revenues, but you'll still get positive.
33:03
And they saw the light, I guess.
33:06
And that's when was there and wrote taxes revenues in the Laffer curve.
33:13
And it's all legend from there on.
33:17
>> Jon Hartley: It's amazing.
33:18
So there's, I'm just curious, you know,
33:21
just on the Laffer curve there's I think many debates.
33:25
Nobody debates that the Laffer curve has some inverted U shape that,
33:30
you know, it's, you know, a 0% tax rate,
33:34
100% tax rate, there should be zero revenue.
33:39
Nobody debates that.
33:40
I think the debate comes in as what's the shape of the Laffer curve.
33:45
And I think there's debates about at what tax rate the revenue maximizing product
33:49
curve was at.
33:50
>> Arthur Laffer: Let me, let me disagree with you first.
33:52
When this was done at that time, the historical Laffer curve,
33:56
which was everywhere,
33:57
the Laffer curve goes back a thousand years to the Mukodima and Ibn Khaldun.
34:02
It, all the classical economists had clearly understood it.
34:05
Price theory understood it completely.
34:07
The Laffer curve, I didn't invent it and I didn't name it.
34:10
But at that time in macro that was not the case.
34:13
They did the type of Congressional Budget Office and
34:16
analysis that if you raise tax rates by 10%, revenues will go up by 10%.
34:20
It was all static analysis, no dynamic.
34:23
And that's what I brought into the discussion there at that time.
34:27
That was very big difference.
34:29
John Was that at that time it was literally that if you raise tax rates,
34:34
even at 110% tax rates, you still collected more revenue.
34:40
There was no incentive effect of taxes on the supply of goods and services.
34:45
Our common friend, well, Ed Shaw put it this way.
34:51
He said in the demand side models of monetarism and Keynesianism,
34:56
supply is a rubber womb which accommodates unembarrassingly any
35:01
fetus of aggregate demand.
35:04
And this is where I got a lot of the supply side things were from Ed Shaw there
35:09
at Stanford and Emile Desprez.
35:11
But now the debate is where is the proper point on the Laffer curve?
35:16
That is correct.
35:17
Everyone has completely conceded the Laffer curve.
35:20
I mean, it's obvious.
35:21
It's the everyone all conceded before I was born too, by the way, just for
35:25
the record.
35:26
Now the issue is there and what you're finding out is the more and
35:29
more you look at it and the more and
35:31
more people understand that it's not just output, it's tax sheltering.
35:34
It's changing the location of your production, changing the timing of your
35:38
production, changing the composition of your production, changing the volume of
35:42
production, changing how much you report tax sheltering.
35:45
And all this stuff that the Laffer curves effect on revenues is getting lower and
35:50
lower and lower and lower and lower and lower.
35:53
Property tax rates in the range of 1 to 2% are now counterproductive with regard
35:58
to revenues.
36:00
International taxes are counterproductive with the tax base.
36:04
The larger the tax base, the more likely it is that tax revenues will be increased.
36:11
The longer you're willing to wait,
36:13
the more likely it is that tax revenues will be lost.
36:17
All of this stuff comes into now just how really dominant
36:21
the prohibitive range of the Laffer curve is.
36:24
I mean, just show Warren Buffett in his 2010, 2011 letter to
36:29
the New York Times on his income where he paid seven and a half million dollars,
36:35
$6.9 million in taxes on an income of 12 and a half billion.
36:40
Clearly showed that, you know, he doesn't pay taxes.
36:43
I mean, it's way out there.
36:45
No one in the top 300 tax fighters pay any taxes at all.
36:50
They all shelter their income.
36:51
I mean, clearly the Laffer curve works in all of these areas dramatically and
36:57
hugely.
36:58
It works in poor people.
37:00
I mean, everyone knows what happens, you know, when people's incomes go up and
37:04
they get their, their welfare payments withdrawn.
37:08
Needs test, means test, and incomes tax, it works there, too.
37:11
I think what's happening in the debate is everyone's coming to realize that
37:16
the prohibitive range The Laffer curve now occurs at very low rates of taxation.
37:20
15, 10% of taxation, I mean we were down,
37:26
we went from 73% in 1921 to 25%.
37:31
Then their tax revenues from the top 1% of income earners
37:36
tripled clearly way in the prohibitive range.
37:40
So what we're seeing in the debates now is every year it moves.
37:44
Go look at Simon Bowmaker's book When the President calls and
37:49
Marty Feldstein's switch in his policy when he did that 86 tax act analysis,
37:55
he found how all these guys with ease just shifted their income and,
38:01
and the 86 tax act paid for itself.
38:04
Bang, the tax cuts and jobs act paid for itself in the first two years.
38:09
In the first two years before we even got legs.
38:12
>> Jon Hartley: Well, you know, it's amazing.
38:14
I mean one, I think it's a great point that you make in you know, one like,
38:17
you know, the Laffer curve is an object that can change over time.
38:21
You know, certainly if people find ways to be more mobile with their,
38:25
their, either their capital or even their labor.
38:30
>> Arthur Laffer: Or even their reporting.
38:31
Not even with their labor or capital.
38:33
Take real things aside, just hiring a good shyster lawyer,
38:37
[LAUGH] that's all it takes.
38:39
>> Jon Hartley: Accountant lawyers are absolutely part of that.
38:42
You're absolutely right, behavioral response-
38:45
>> Arthur Laffer: Huge part, huge.
38:45
>> Jon Hartley: There's many- >> Arthur Laffer: Hiring politicians.
38:48
>> Jon Hartley: Right, and so it all comes down to this object of ETI,
38:54
elasticity taxable income, how's your- >> Arthur Laffer: Taxable,
38:59
it's elasticity of reported income.
39:03
>> Jon Hartley: Right.
39:04
>> Arthur Laffer: And it's reported.
39:05
>> Jon Hartley: Exactly. >> Arthur Laffer: They make tons of
39:06
unrealized capital gains increases are income.
39:10
Take Simon, they're clearly income, but they're not taxed and
39:15
you have a step up basis at death, duh.
39:19
>> Jon Hartley: So it's not just incentive facts,
39:22
it's many things that go into defining taxpayment from elasticity.
39:26
>> Arthur Laffer: Yes, exactly.
39:27
>> Jon Hartley: In the shape of a Laffa curve.
39:28
And we could also even have, you know, different laughter curves for
39:31
corporate income, for individual income, for you know,
39:34
capital gains type income and, and obviously capital gains.
39:37
And I think corporations are a little bit more mobile than individual income,
39:40
so I don't really- >> Arthur Laffer: Not really, they aren't.
39:43
They really aren't.
39:44
You've got lawyers that can do it anywhere at any time, any place.
39:48
It's really amazing.
39:50
>> Jon Hartley: Certainly for high income people that can afford that at least.
39:52
>> Arthur Laffer: Well, they're the people do it.
39:53
They're the ones rates.
39:55
You know, when you see a group of people hanging out with Obama,
39:58
Wama don't think it's street people.
40:00
People trying to explain to them what it's like being poor.
40:02
These are people from Goldman Sachs who want to put in a new
40:06
tax deduction there for campaign contributions.
40:09
And rich people can buy everything.
40:12
They have the ways, they have the means, they have the ability to do all that.
40:15
They can change all these things.
40:17
And don't think for a moment they won't use it instantaneously.
40:20
It doesn't take a long time for them to figure this out.
40:23
It takes one good meeting with a lawyer and.
40:25
And then what you do is you hire all the IRS lawyers,
40:28
which is what Morgenthau complained about.
40:30
Every time they change.
40:32
Trained a good tax lawyer, the private sector came in,
40:35
offered him 10 times as much to come and work on their side against the tax lawyer.
40:39
I mean, it's just nature, and pretty girls attract guys, it doesn't take a long time.
40:47
>> Jon Hartley: Absolutely.
40:48
Now, you know, >> Arthur Laffer: I hope you're enjoying.
40:50
>> Jon Hartley: I wanna talk about the Reagan era with you.
40:52
>> Arthur Laffer: Yes, let's- >> Jon Hartley: Let's talk about
40:53
just the Reagan Air for a minute.
40:54
The Reagan tax legacy is a big one.
40:56
The margin operating cut from, you know, the 70 range to, you know,
41:01
20, >> Arthur Laffer: 28,
41:01
>> Jon Hartley: 28 when he left office.
41:03
And I'm curious, like, what.
41:05
What was the involvement of the Reagan Economic Policy Advisory Board
41:08
during this time?
41:09
>> Arthur Laffer: How much?
41:10
>> Jon Hartley: Yourself there?
41:11
>> Arthur Laffer: Myself, it was a lot.
41:12
You know, I'd done my thing, the complete flat tax, which I'd written,
41:15
which was a complete.
41:16
Just flat tax from first dollar to last dollar, no deductions, exemptions,
41:19
exclusions thing.
41:21
We, we got the tax cut of 1981 ERTA, which is based upon Kennedy's
41:26
tax cuts of 30% across the board, which I was able to get Jack Kemp to do
41:31
it because his middle name was French and he wanted the JFK the second.
41:37
Boy, so we did that one, that one worked.
41:40
But Reagan phased it in and it caused the 81, 82 depression.
41:44
But then when we got to the 86 act, which was the real one that was on the paper,
41:49
I did, which was the complete flat tax, that one, we took the rate down to 28%.
41:54
We went from 14 tax brackets to two tax brackets.
41:58
We cut the corporate rate from 46 to 34%.
42:01
We did deductions, got rid of deductions, exemptions, exclusion.
42:05
It was static, revenue neutral.
42:06
I mean, that was the closest thing to God in heaven that ever existed.
42:12
And it worked, it worked like mad.
42:15
That's where Marty found that all the people's responses were tax revenues and
42:20
the rich went up, went up on that.
42:23
Go, go ask your, your friend.
42:25
>> Jon Hartley: Yeah, >> Arthur Laffer: yeah, sorry, go ahead.
42:27
>> Jon Hartley: No, no, I, I think, you know, I think a lot of people would agree
42:31
with you that you know, that you know, in, certainly in the, you know, JFK and
42:36
Reagan tax king era, we, we were on the, the right hand side of the,
42:40
the Laffer curve and, and >> Arthur Laffer: we came down.
42:42
Yeah. >> Jon Hartley: And cutting rates,
42:44
I think you'd actually get a lot of agreement amongst many economists and
42:49
so, it's an amazing time.
42:51
But the JFK and Reagan revolution, Larry Kudlow, Brian Dimitrovic
42:57
have a great book written on this and- >> Arthur Laffer: Yes, they do.
43:02
>> Jon Hartley: And it's fascinating.
43:04
I want to talk a little bit.
43:05
I just want to put away from presidents and federal policy for
43:08
a little bit because another part of your legacy is on top of working presidents.
43:12
You've had a lot of success in getting states to cut their tax rates.
43:16
And, and you know, there's many states ranging from, you know, Kansas,
43:20
understand Brownback.
43:23
There's, you know, for example, there's Tennessee where you're living now.
43:27
You know, and I, I so you know, there's a lot of evidence in general, you know,
43:32
that shows that, you know, states that didn't cut taxes are now losing people.
43:37
There's a lot of great work that's done by, of folks,
43:42
Hoover scholars, Josh Rao and co-author Ryan Shu showing their
43:46
behavioral responses to stating of taxation.
43:50
And looking at California, how many people have left
43:54
California in response to furthe state tax increases in California.
43:59
And I know you're one of these people, you know, you lived in Southern California and
44:02
you now live in Nashville, Tennessee, which is a zero state income tax.
44:05
So you in fact you yourself are part of this trend.
44:08
I'm just curious sort of at a broader picture.
44:10
I mean, what in your mind is the legacy of tax relief in the states in the past
44:14
few decades?
44:15
>> Arthur Laffer: Well, started off with Prop 13.
44:16
I was very involved in that, as you may know, with Howard Jarvis and Paul Gann.
44:20
And we cut the highest property tax rate in California
44:24
from 2.7% effective rate to 1% in one evening a bang.
44:29
I worked with Jerry Brown closely, if you could see my wall here when he came down.
44:32
And I spent a lot of time with him and went up there to Sacramento the next day
44:36
when it passed and worked with him on the subventions and
44:39
getting it work and started all that we do.
44:42
ALEC American Legislative Exchange Council does the rich states, poor states,
44:47
the ALEC Laffer rankings of all the states and I've worked on it.
44:51
Your guys have done a great job as well.
44:53
And it just super.
44:55
And yeah, it's really CLEAR those, those 11 states that adopted an income tax since
45:00
1960 have really underperformed the nine states that, that don't have an income
45:05
tax have way outperformed the states that have the highest income tax.
45:09
It's it, it.
45:10
As Larry Gatlin says, it ain't rocket surgery, it's just common sense, duh.
45:17
I mean, why would you go to a high tax location if you can go to a lower tax
45:21
location?
45:22
Now I love, love, love California.
45:24
And if it hadn't been for Prop 13, California would be West Virginia.
45:28
Prep 13 is the only thing that keeps you guys alive.
45:31
But if you look at it coming here, we have no desk tag, no state, all that stuff.
45:35
I mean, it's really cool and you know, it's a great place to be.
45:40
Earning income with lower tax is a lot more fun.
45:45
>> Jon Hartley: Yeah, well, I just think now in the post Covid era, you know,
45:49
I feel like in the 2010s this was, you know, sort of like a big debate.
45:55
And you know, there's, you know, folks like Paul Krugman who are,
45:58
you know, attacking you for advising.
46:01
>> Arthur Laffer: He doesn't do data, but he doesn't do data.
46:03
You know, this is, this, see, this is just opinion.
46:05
Krugman sits there and says, I caused the race riots in Buffalo.
46:08
Okay, go for it, Paul.
46:10
You know, he doesn't do data.
46:12
And the data are really very clear.
46:14
>> Jon Hartley: Right. >> Arthur Laffer: Low tax rate states
46:15
outperform high tax rate states, period.
46:17
There are other things that matter.
46:19
That's true, but that is clearly one of the biggest things that matters.
46:23
>> Jon Hartley: And I think you've,
46:24
I think in many respects you've won this argument.
46:27
And perhaps it hasn't been said.
46:29
And you know, I just think, you know, it's really people's behavior that says it all.
46:34
But you know, in the post Covid era, Covid sort of gave this excuse for so
46:39
many people to move and to switch states.
46:43
And what's happened now is, you know, you see these, you know,
46:48
significant migrations from all these states, you know,
46:52
Illinois, New York, California to low income tax states.
46:57
The Texas is in California.
46:58
You see tons of businesses moving, tons of corporations moving,
47:01
tons of people, especially high income individuals who are leaving.
47:04
And this is borne out in the data point folks,
47:08
>> Arthur Laffer: decades and
47:09
decades and decades.
47:10
>> Jon Hartley: Right?
47:12
So I think you won that argument.
47:15
I'm just curious, I wanna talk about just economic stimulus for a moment.
47:19
And sort of speaking of COVID, I mean, you and
47:21
I actually wrote a few op eds together in 2020 in national view, Fox Business.
47:25
>> Arthur Laffer: Yes, we did.
47:26
We had some fun, didn't we?
47:27
>> Jon Hartley: We did. We did.
47:29
This was amidst the debate about what to do with COVID and and sort of stimulus or
47:33
really more, I'd say, social insurance.
47:36
People were not allowed to work.
47:38
You know, you had these terrible lockdowns.
47:40
They were being enforced by the government.
47:42
There's a question of, you know, what do we do to fill the gap or to help people.
47:47
And I think we were on the side of arguing that it should be
47:51
a thoughtful process in terms of what we do with businesses and
47:56
employees and how to help those relationships.
48:00
Endure sort of to offset the negative effects of the lockdown.
48:05
So we argued for payroll tax cuts and
48:07
negative payroll tax cuts that would be sort of superior to grants allocated by
48:12
the Small Business Administration along with unemployment insurance.
48:17
Just because it'd be a more efficient way to keep employers in place.
48:19
>> Arthur Laffer: Exactly, >> Jon Hartley: rather than working.
48:20
Through the banking system.
48:21
SBA isn't through to do it.
48:23
I talked to a lot of people.
48:25
We talked to a lot of people at the time.
48:26
And, and you know, the problem was, you know,
48:29
the IRS didn't have the capacity to do it to like turn the spigot the other way.
48:34
That those are the reason that I got.
48:36
And so, I mean, there's some weird state capacity issue going on.
48:39
I'm curious, sort of looking back five years.
48:41
>> Arthur Laffer: It's just a bad thought process.
48:43
And this was Mnuchin and Larry Kudlow.
48:45
I talked with the President on this a couple of days after.
48:47
And just the question you put it.
48:49
You got to fix some of money.
48:52
Which would you prefer to do to give that money to people who don't work or
48:57
to cut taxes on people who do work?
49:01
It's not.
49:03
I've advocated along with you, I think, was the abolishment of the payroll tax for
49:08
a year and a half, same a dollar amount as the stimulus spending,
49:12
same amount static revenue there, which you think would have worked better
49:17
paying all these people money not to work or having no payroll tax for a year and
49:21
a half on people who do work.
49:23
>> Jon Hartley: Or even a wage subsidy to some degree.
49:26
You know, >> Arthur Laffer: you don't even
49:26
have to do that.
49:27
Just, just cut the payroll tax.
49:29
That's a wage subsidy, if you want to think of it.
49:31
Stop taxing wages, both employer and employee, and
49:34
you'll increase employment dramatically.
49:36
The wedge will be different, just reduced.
49:38
That's all.
49:40
>> Jon Hartley: Yeah, >> Arthur Laffer: and that's what we
49:41
should have done.
49:41
We would have never had the problem in 2008 when they had the,
49:45
the Great Recession, as they called it.
49:48
My, my, my solution to that back then was to have a complete cessation of all
49:52
federal taxes for a year and a half, same dollar amount.
49:56
Can you imagine?
49:57
No federal taxes, no payroll taxes, no capital gains taxes, no death taxes,
50:02
no income taxes, no income.
50:03
All these.
50:04
Get rid of all federal taxes for a year and a half, which is the exact same amount
50:09
as the, as Obama Wama and Bushy Bushy spent on it, did that.
50:13
Can you imagine what would happen in this country if we had no federal tax at all?
50:16
We, we'd be selling cars into central China you know,
50:19
these guys all think that writing checks is the same thing as not collecting taxes.
50:24
It's not true.
50:26
It's totally different, Jon.
50:28
And the Keynesians and the monetarist don't understand that.
50:32
They really don't.
50:33
Milton Friedman,
50:34
in the monetary history of the United States doesn't mention income taxes.
50:37
In 1930s, we raised the highest tax rate from 25% to 63%.
50:43
On January 1, 1932, we shortened the brackets.
50:46
We then raised it all the way up.
50:49
In 1937, we raised it to 79% then we raised it to 94% in 1944.
50:56
Hello.
50:57
Is it going to surprise you?
50:58
But where is that in the monetary history of the United States?
51:01
It's not because that's not where these people were focusing on then.
51:06
And that's what you and I and a bunch of others have brought back into the thing is
51:10
the classical marginal rates of substitution and between labor and
51:14
leisure.
51:14
And that's what drives the system.
51:19
>> Jon Hartley: So, I'm with you.
51:21
You know, I think there is this, >> Arthur Laffer: I know you are,
51:24
>> Jon Hartley: you know, there,
51:24
there's this massive renaissance in, in fiscal research that I think shows that,
51:28
you know, these fiscal multipliers, you know, are, are,
51:31
are >> Arthur Laffer: negative
51:31
>> Jon Hartley: statistically much lower,
51:32
you know, close, much closer to zero.
51:35
>> Arthur Laffer: You're not going to put them, they're negative.
51:37
>> Jon Hartley: It depends on how you measure.
51:38
I, I think to some, some degree.
51:39
>> Arthur Laffer: They made the mistake.
51:40
If it's not negative, they made a mistake in how they measured it.
51:43
>> Jon Hartley: Well, you do have to pay it back over time.
51:45
Right? So like, you know, so
51:46
there might be some positive effects in this year,
51:49
but you will eventually have to do this with you.
51:51
>> Arthur Laffer: I'm going to do this.
51:52
>> Jon Hartley: So I want to, my last question for you,
51:55
I think is an interesting one and one I want to talk about Trump policy for a bit.
52:01
But you know, 2018, you wrote the book Trumponomics with Steve Moore and
52:06
you know, you describe that, the Trump economic agenda,
52:11
I think fairly well in that book.
52:14
I'm curious, how would you.
52:16
We've talked about the successes so far.
52:17
I think we're on the same page with the Tax Cuts and Jobs Act.
52:21
And you know, we hadn't had a big corporate reform since the 1980s,
52:26
since the 86 Act.
52:28
And you know, in terms of the one big beautiful bill,
52:31
extending many of the items from the Tax Cuts and Jobs act,
52:35
making some of them permanent, full expensing permanency is terrific.
52:41
Josh Rao, Kevin Hassett, myself also,
52:44
who are fellows wrote a paper on this when it was sort of up in the air and
52:50
I think we along with many others influenced some of that debate and
52:56
permanence on at least for equipment and R and D.
53:00
Those are permanent structures is now fully expensed that will be,
53:05
is going to have to be renewed or will expand expire in a few years.
53:10
So but we've got most of the Taxes and Jobs act which you obviously played
53:15
a huge part in is, has been extended and many parts of it made permanent.
53:20
Lots of evidence that we've shown that.
53:22
>> Arthur Laffer: It worked really well.
53:23
>> Jon Hartley: It influences capital spending capex and I think at some level,
53:27
you know, it's, it's a shame that you know, we left corporate tax rates as high
53:32
as we did for so many decades and it's great that we now have full expensing like
53:36
permanent full expensing like some other countries do as well.
53:40
So all good for incentivizing corporations to purchase property, plant, equipment,
53:44
you know, that, that, that, that's a boon for the economy.
53:48
I'm just curious you know, what one, what remains left to be done in,
53:53
in your mind one or what's sort of the next in,
53:57
in economic policy and in particular as it relates to tax policy.
54:01
And I'm curious also like know I think it's fair to say that you know,
54:07
the GOP has a lot of divided minds on, on economic policy these days.
54:12
You know there's you know, what some people call the new right.
54:17
There's folks like Orin Cass that very much rail against I would say your legacy,
54:24
you know, the legacy of the supply siders.
54:28
Who talk about you know, Reagan tax cutting and you know,
54:32
I guess JFK tax cutting and others.
54:35
The Trump's tax cuts as well to varying degrees unfavorably, and
54:39
you know they're I think maybe more focused on maybe redistribution.
54:44
But you also have big proponents of tariffs.
54:47
You have big proponents of, of say, you know, child tax credits, family policy.
54:53
You have big proponents of you know.
54:56
Just.
54:58
Of union policy and so forth and to really completely change the GOP's
55:03
economic policy to be less focused on, I'd say growing the pie for
55:09
the entire economy and to be focused in certain areas.
55:13
So I'm curious what you think about that shift.
55:16
I think those people are ascendant in the gop.
55:19
It's hard to say how much power I think they truly have, but I mean I think
55:23
they've had a lot of influence on not just President Trump, but in particular,
55:28
J.D. vance and I think Marco Rubio as well, I think it's fair to say.
55:32
I'm curious what you think about that sort of internal split within the GOP
55:35
>> Arthur Laffer: based on data.
55:36
They don't make much sense at all in that stuff.
55:38
I mean, I look at Trump, and
55:40
I think he's probably the most transformational president in US History.
55:44
I mean, I tease him about Reagan all the time.
55:47
I mean, I say, you know, sir, Reagan got the highest rate, down to 28%.
55:51
You're stuck at 37.
55:52
And he always said, but how we have fun in that stuff.
55:55
>> Jon Hartley: But he's got a portrait of Ronald Reagan in the law.
55:58
>> Arthur Laffer: Who doesn't?
56:00
I mean.
56:01
I think God has a portrait of Reagan in his office.
56:03
I mean, come on.
56:05
But you know, if you look at it there, we have a couple of things to do on, on,
56:10
on taxes.
56:11
We, we do have a little bit to go to match Reagan low rate, broad based, flat tax.
56:15
The one I did for Jerry Brown when he ran for president in 92.
56:19
But the one I think is the sleeper that you haven't mentioned is health care
56:24
price transparency.
56:26
And that is a huge one, Jon.
56:28
I think if you got some of your guys to work on that, that you post transactions
56:32
prices so that people can make their decisions as to what their health care
56:36
they want their health care to be, you'd reduce the insurance market dramatically.
56:41
You would make the system really efficient.
56:43
Life Expectancy in the US has been declining dramatically over the last 55
56:48
years versus the OECD.
56:50
Expenses have been going up all because no one knows what,
56:54
what the prices are, the transactions prices.
56:57
That's a huge area and it's about 17, 18% of GDP.
57:01
I'm talking to the President about this.
57:04
In fact, he did the executive order in his first term on that.
57:09
That I think is big.
57:10
And I think what he's doing is just super on that stuff.
57:15
I mean, I don't know, other than creating peace for the world in Ukraine.
57:18
Peace for the world with the Houthis.
57:20
Peace for the World and 85 other conflicts, including Prosp, charity for
57:24
everyone else.
57:24
Have everyone smiling and happy, having ice cream cones.
57:28
I mean, this is the single most transformational administration ever.
57:33
Reagan was amazing, I mean, really amazing.
57:36
But Trump is just, my God, he's gonna cure everything.
57:40
And he is, in six months, look what he's done.
57:45
>> Jon Hartley: No, it's amazing.
57:46
>> Arthur Laffer: Energy decontrol.
57:47
Have you seen what the results of that have been?
57:49
I mean, wow.
57:51
I mean, you know, and I think the left is shifting.
57:53
I think they realize, I mean,
57:55
when Hillary Clinton said that if he succeeds on the Ukraine Russian war,
57:59
he should get the Nobel Peace Prize, what Hillary said that about Trump?
58:03
How cool is that?
58:05
I think the Democrats are going to be the newest, freest market.
58:08
It's like all the people we got from the Eastern bloc once the wall fell down,
58:12
you know, once you've lived under communism,
58:15
you want free enterprise all the rest of your life.
58:18
And I think all the Democrats are going to love becoming really
58:21
hard Trump Republicans.
58:22
The Trump derangement syndrome is going to turn into the Trump love syndrome.
58:27
And all of these.
58:28
Gavin Newsom.
58:29
My God. How can I,
58:31
how can I How can I follow my inner Trump?
58:35
They're all going to do that very soon.
58:37
You watch the changes that these guys are making.
58:40
They're gonna become us, Jon.
58:43
>> Jon Hartley: We'll see how Emanuel and some of these other demonates.
58:47
I'm curious, any thoughts on, on the new Right and for
58:51
those that are out there who are really going after your legacy and
58:55
sort of the going after the supply side legacy, there have.
58:59
>> Arthur Laffer: Been mistakes made all over the place and, you know,
59:02
incentives matter.
59:03
And if you look at the research there, how can you get anything more than what I did
59:07
with Brian Dimitrovic and tax and Gene Sinkfield, by the way.
59:11
And taxes have consequences.
59:12
I mean, we've looked at every single tax return.
59:15
It's not a sampling problem.
59:17
We know the last guy in the top 1%.
59:19
We know the first guy in the bottom nine.
59:21
We don't have their names, but we know how many dependents they have.
59:23
We have all the data, everything there, it's all from Sias, Piketty, by the way.
59:27
It's all from the Institute of Inequality up at mit.
59:31
They've got great data.
59:32
It's just they don't know how to use it.
59:34
And if you look at it,
59:35
every time we've raised the highest tax rate, the economy's underperformed,
59:38
tax revenues from rich have gone down and the poor have been hammered.
59:42
Every time we've lowered tax rates on the rich, the economy has outperformed,
59:45
tax revenues from the rich have gone up and
59:47
the poor have been provided opportunities and jobs and better lives.
59:51
What more do you want?
59:52
I mean, I've got all the other numbers in there as well.
59:55
I mean, I'm just talking about the, the inequality people.
59:58
But who, who's against poor people having higher incomes?
1:00:02
Who on earth is against that?
1:00:04
>> Jon Hartley: Absolutely.
1:00:05
Amen. No, I couldn't agree with you more yet.
1:00:08
>> Arthur Laffer: And these guys are not using the data correctly.
1:00:10
And they're just me and I, >> Jon Hartley: they.
1:00:13
Definitely have a different social welfare function.
1:00:15
I think that's definitely.
1:00:15
>> Arthur Laffer: No, they don't know data.
1:00:18
And so they make assumptions that by taking for the rich you can help the poor.
1:00:22
That's.
1:00:23
Excuse me, that's bull poop.
1:00:25
It's not true.
1:00:26
Whenever you try to take from the rich, you get less money.
1:00:29
You get less money, you have less to give to the poor.
1:00:31
I would love to do a debate at Hoover if you guys wanted to sponsor it with Saez or
1:00:36
Piketty or any of those.
1:00:37
You just get it There, make it a Hoover Institution.
1:00:39
We'll make, make it two hours so we can get through the one liners and the slur,
1:00:44
you know, the slurs and the slams and the sort of, you know, virtue,
1:00:48
virtue signaling and all that crap and get down to serious stuff.
1:00:52
What did happen with the tax cuts and Jobs Act?
1:00:55
What happened with the Kennedy tax cuts?
1:00:57
What happened with the Reagan tax cuts?
1:00:59
What happened with the Trump tax cuts?
1:01:01
What happened with the tax increases under Hoover?
1:01:04
What happens with the tax increases under Roosevelt?
1:01:06
What happened with all of these?
1:01:09
We have those data.
1:01:10
Let's sit down and see what happened.
1:01:12
What happened.
1:01:14
>> Jon Hartley: I couldn't agree more.
1:01:17
Now work on- >> Arthur Laffer: I'll come and do it, but
1:01:19
you got to make it long enough so it's not a, you know,
1:01:22
it's not a slogan slamming thing.
1:01:24
I did this in UT Austin with, with, with Galbraith, Jamie Galbraith.
1:01:29
And at the end he said, I laugh or you're right.
1:01:31
The 86 tax act was the best thing for inequality, the best thing for
1:01:34
the economy ever.
1:01:36
I mean, you know, they know they're wrong.
1:01:39
They just need to be shown it and with their data.
1:01:42
>> Jon Hartley: I, I as an empirical economist, I, I couldn't.
1:01:45
>> Arthur Laffer: I know you are, you're the best.
1:01:46
By the way.
1:01:47
>> Jon Hartley: That's very kind.
1:01:49
>> Arthur Laffer: Well, it's true.
1:01:49
And Kevin Hass is the best.
1:01:51
I mean you've got the greatest advisor in Kevin and you know, and Kogan too, by
1:01:56
the way, that you've got some great people there at Hoover sponsor that debate.
1:02:00
And I'll do it, and Sayas can flop down from Berkeley.
1:02:05
You could even bring my classmate with him, Georgie Akerloff,
1:02:08
bring him down with him.
1:02:09
Bring Janet down.
1:02:10
Yellen.
1:02:11
Let's have a serious one on one Monty Mano facts, let's see what it is.
1:02:16
Proposition we should raise tax rates on the rich.
1:02:19
That should be the proposition.
1:02:21
I say no, they say yes.
1:02:23
>> Jon Hartley: Okay, I really wanna thank you for coming on, this has been-
1:02:25
>> Arthur Laffer: I love it, Jon, I'm so
1:02:27
proud of you.
1:02:27
I can't stand it.
1:02:28
By the way, just I've known you for a long time.
1:02:31
We've done work together.
1:02:33
You are a great promising young man.
1:02:37
One of my sessions with George was on the Governor's Council of Economic Advisors.
1:02:42
And I think it was 2005.
1:02:47
George Schultz, myself, Milton Friedman were there and
1:02:50
I was complaining about something.
1:02:52
I said, God Damn it, I'm 65 years old and I'm sick.
1:02:55
And George, who had this power over me that whenever he raised his voice it was
1:02:59
like my dad, he scared the hell out of me.
1:03:01
Arthur, stop right there.
1:03:04
I said, I just want you to know that I still consider you a promising young man.
1:03:12
And I looked at him and you know, I can't stop from commenting on things.
1:03:15
So I looked at him and said, and I suppose that's what Milton says to you,
1:03:19
is it, George?
1:03:19
He said, absolutely not.
1:03:23
Milton never mentioned the word promising [LAUGH].
1:03:27
[LAUGH] Just great, I miss those days, I miss you guys.
1:03:30
I miss California, but I don't miss the taxes, I don't miss the regulations.
1:03:35
I don't miss the hostility.
1:03:37
We here in Tennessee, if you drive by someone, you know,
1:03:40
you're driving your car and you see a car coming or a truck coming the other way,
1:03:43
you go like that on the steering wheel, you know,
1:03:45
in California it's the same thing, but they use a different finger.
1:03:50
You know the hostilities you have there.
1:03:53
In a state run organization, things are just really overbearing.
1:03:58
Not only do we have lower tax rates, more prosperity, more in migration,
1:04:02
less out migration, better education improvements and
1:04:05
all of that stuff which we do, we also have less anger, less hostility.
1:04:10
Low taxes solve all sorts of problems.
1:04:14
Stable money solves all sorts of problems.
1:04:16
Deregulation solves all sorts.
1:04:19
Free trade solves all sorts of problems.
1:04:21
I mean know, government cutting government spending solves all sorts of problem.
1:04:25
Low rate, broad based, flat taxes, spending restraint, sound money,
1:04:30
minimal regulation, free trade, and then get the hell out of the way and
1:04:35
let the economy solve its own problems.
1:04:37
They'll do a lot better job than government people or
1:04:40
people working in socialist organizations like Hoover.
1:04:44
You are a socialist organization.
1:04:47
Pay is not determined by how many students you get.
1:04:52
Pay is not market driven.
1:04:54
And I've never heard, I've never really believed anyone from the universe,
1:04:58
from a university can be a conservative.
1:05:01
You can't be a conservative living in a socialist state and liking it.
1:05:05
That's my story and I'm sticking to it.
1:05:07
Jon, you gotta get out the private sector for a while.
1:05:12
>> Jon Hartley: The private sector, I agree,
1:05:13
I've spent some time there and there's nothing like it that's more meritocratic
1:05:17
than- >> Arthur Laffer: And
1:05:17
you enjoy life very much and thank you for having me, I've been waiting for
1:05:21
your phone call to do that debate.
1:05:23
Anyone you want, I'd be glad to do it.
1:05:25
>> Jon Hartley: All right, thanks so much, for coming on.
1:05:28
This is the Capitalism and Freedom in the 21st century podcast and
1:05:30
official podcast of the Hoover Institution Economic Policy Working Group,
1:05:33
where we talk about economics, markets, and public policy.
1:05:36
I'm Jon, your host.
1:05:37
Thanks so much for joining us.