Today’s Brew 1-15-15

Professor Brian Domitrovic writes at about the Laffer Curve and its real anniversary. This column is pretty interesting and informative.

The Laffer Curve Anniversary Is Just Now

It was not the first time that Laffer had sketched the curve, even for Rumsfeld. Laffer, a professor at the University of Chicago business school, had been putting it on the chalkboard for years. George Shultz, Laffer’s dean at Chicago and then his boss at the Office of Management and Budget, along with Shultz’s Chicago buddy Rumsfeld, had surely been treated to the curve before.

So it sort of was not the anniversary of the Laffer curve in December. Now, the reason that that meeting became famous was because of attendee #4, Wanniski. He is the one who let the story out about that evening. The first reference to the curve came forty years ago not last month but just now, care of Wanniski. In the spring 1975 issue of the journal The Public Interest, Wanniski set down in print (without calling it expressly the “Laffer curve”) Laffer’s argument about tax rates and receipts, in a footnote in fact.

– – – – –

The John F. Kennedy tax cut—the book Larry Kudlow and I are writing about it forthcoming—had Laffer-curve argumentation all over it. Kennedy himself said that a “creative” tax cut such as he was offering (a cut in rates) would have the “paradoxical” effect of enhancing receipts.

When Kennedy was trying to ram the bill through Congress in 1963, he lowered the capital gains rate by four points to make it more palatable to budget “scorers” in the House, in that it was clear to all that capital really responds to incentives. The bill passed the House much on the strength of the revenue-reflow argument concerning capital-gains rate cuts. The Senate took that part of the bill out a few weeks later. Albert Gore of Tennessee, sitting on the Finance committee, was offended because it was so kind to the rich, even if a boon to the Treasury. “Tax the Rich!” by lowering their rates, the Wall Street Journal would blare.

– – – – –

It was a missed opportunity, 25 years ago, that this country did not permit the 28 percent top rate to survive any more than three years, 1988-90. This low rate surely would have proven itself productive of receipts. Had we discovered this, given a little time in the 1990s, we would have comprehended the real dynamics of marginal tax cuts. They can be so productive of receipts and growth that low rates can lead to a virtuous cycle of a sequence of tax cuts.

President George H.W. Bush broke his “no new taxes pledge” in 1990, raised the marginal rate past 28 percent, and we never got the clarity. His son’s “tax cuts” in the 2000s were largely non-marginal, damaging the clarity even further. As the Laffer curve turns 40—or is it 50?—the lesson that tax rates can stifle real economic activity remains one of the great flashes of insight of modern public policy.


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