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Latest Laffer: Rich Too Smart to Pay Higher Taxes

April 13, 2009

Back in 2004, President Bush rejected John Kerry's plans to roll back the tax cuts for the wealthiest Americans, arguing, "The really rich people figure out how to dodge taxes anyway." Now five years later, supply side snake oil salesman Arthur Laffer has resurrected the Bush claim. Barack Obama will raise taxes on lower and middle class Americans, Laffer now insists, because the rich are too smart to pay them.
That moment of conservative clarity came during Laffer's appearance Saturday on Fox News' Journal Editorial Report with the WSJ's Paul Gigot. In response to President Obama's promise kept on the largest middle class tax cut in history and budget proposal to return to Clinton-era rates for upper income earners, Gigot and Laffer concluded "we [are] entering a new era of much higher taxes." And Obama will raise taxes on lower income Americans because, Laffer pronounced, "it cannot be done at the high end because those people can get away from it."
Laffer's belief that working Americans will have to pay higher taxes because the wealthy won't is neatly summed up in this exchange (video here):

GIGOT: Well, how are they going to go? It's now 35% top marginal income tax rate. Under Clinton it was up to 39.6%, and that's how high President Obama says he's willing to let it go. But in the past, as you know, they were as high as 70% before Reagan came into office, and even 90% under Roosevelt. How high are they going to go?
LAFFER: That's right. I don't know how high they're going to go. But I'll bet you they're going to go a lot, lot higher than 40%. I think they're going to extend the payroll tax. I mean, when you look at the income tax, Paul, I mean, you really can't collect much money from upper-income people. They know how to get around taxes. So if you want to raise revenues, you've got to do it in low-level, broad-based taxes. That includes the income tax, that includes the payroll tax, that includes sales taxes. So would I guess they're going to really go after these the low-level, high-revenue-base taxes in the next four or five years.

Of course, when it comes to tax evasion, the rich will always be with us. And due to the successful efforts of Phil Gramm and other Republican class warriors in their 1990's war on the IRS, the losses to the U.S. Treasury have reached epic proportions. Thanks to the GOP's gutting of the IRS, by 2007 the amount of federal revenue lost to fraud and unpaid taxes catapulted to $300 billion. As David Cay Johnston detailed in his book, Perfectly Legal, when the tax man cometh, he cometh for poorer Americans:

"In 1999, for the first time, the poor were more likely than the rich to have their tax returns audited. The overall rate for people making less than $25,000 a year was 1.36%, compared with 1.15% of returns by those making $100,000 or more...Over the previous 11 years audit rates for the poor had increased by a third, while falling 90 percent for the top tier of Americans."

For Arthur Laffer, the remedy to upper class tax fraud isn't heightened enforcement, but lower tax rates. For their clever tax avoidance, both legitimate and criminal, wealthy Americans should not punished, but rewarded. Sadly, this kind of blinkered thinking - irrational, illogical and immoral - doesn't merely pass for orthodoxy among the conservative faithful, it is given credence in the mainstream media.
As the New Republic's Jonathan Chait detailed, we've been here before with Arthur Laffer. In his 2007 book, The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics, Chait charts Laffer's course from failed OMB bureaucrat to prophet of the supply-side revolution. Having "left the government in disgrace" after producing calamitously wrong GDP predictions, Laffer paired with columnist Jude Wanniski to help birth the Reagan revolution:

Adherents of supply-side economics tend to describe the spread of their creed in quasi-religious terms. Irving Kristol subsequently wrote in a memoir, "It was Jude [Wanniski] who introduced me to Jack Kemp, a young congressman and a recent convert. It was Jack Kemp who, almost single-handed, converted Ronald Reagan to supply-side economics." The theological language is fitting because supply-side economics is not merely an economic program. It's a totalistic ideology. The core principle is that economic performance hinges almost entirely on how much incentive investors and entrepreneurs have to attain more wealth, and this incentive in turn hinges almost entirely on their tax rate. Therefore, cutting taxes-- especially those of the rich, who carry out the decisive entrepreneurial role in the economy--is always a good idea.

Of course, the famous Laffer curve, with its magical claim that "that at higher levels of taxation, reducing the tax rate would produce more revenue for the government," is historically and empirically false. Reagan, after all, was forced to raise taxes twice after his supply-side cuts produced a mountain of red inks. As it turned out, U.S. national debt tripled under Ronald Reagan, only to double again under his upper income tax cutting heir George W. Bush. (So much for the myth of Republican fiscal discipline.) Despite its failure, the eventual 2008 Republican presidential John McCain drank the Kool-Aid, declaring, "tax cuts, starting with Kennedy, as we all know, increase revenues." In response to President Obama's call to end the Bush tax cuts for those earning over $250,000 a year, Texas Republican Senator Kay Bailey Hutchison offered the purest statement of Arthur Laffer's fantasy:

"Every major tax cut we've had in history has created more revenue."

And so it goes. A generation after he helped engineer both a massive redistribution of wealth and a five-fold increase in American national debt, Arthur Laffer is at again. Peddling his new book, The End of Prosperity: How Higher Taxes Will Doom the Economy--If We Let It Happen, Laffer's message is a simple one.
Leave the rich alone.
UPDATE: Sadly for Arthur Laffer, wealthier Americans voted with their wallets - for Barack Obama. Four years after George W. Bush carried those earning over $200,000 by 63% to 35%, Obama comfortably beat John McCain among the same group by 52% to 46% And while a CBS/New York Times poll last week showed three-quarters of American back Obama's call to restore the upper income tax rate, a new Gallup survey revealed Americans' "views of income taxes among most positive since 1956."

6 comments on “Latest Laffer: Rich Too Smart to Pay Higher Taxes”

  1. While I'm right there with you in my dislike of Laffer, I think that in your scorn of anything that comes out of his mouth, you've largely missed the mark on what his fallacy actually is. The curve isn't magical or special, it represents an optimization problem that most kids would have solved in high school calculus. To maximize revenue, you move the tax rate to be as close as you can get it to the top of the little rainbow.
    Where supply-siders differ from real economists is the ideology that no matter what the real economic circumstances may be, the tax rate is *always* on the right half of the curve, so moving it to the left by lowering taxes will *always* increase revenue. Any time a Republican claims that lowering taxes will increase economic output, they're claiming that we are on the right side of the curve. That's the neat little parlor trick that Laffer drew up on his napkin back in the day. It conveniently ignores the entire left side of the curve that says that increasing taxes will increase revenue and economic growth.

  2. Thanks, well done and timely. We need to stand up and keep the truth in front of all those who would prefer to live a twisted distortion of today and yesterday. History will be clear, it's the future I worry about. "Knowledge is power."I look forward to checking back to your blog often

  3. When Laffer says he believes the rich will not pay as much, he is not necessarily calling this fraud. They will find legal ways to adjust their income. So you cannot predict the revenue. Of course, they still pay a large proportion of the tax. It is hard to call tax cuts a "redistribution of wealth." Earnings are wealth. You can only redistribute this by repossessing it. Unless you feel it was earned dishonestly, you have no right to take it just based on the amount. Any income tax is a gift by those with more earning power, unless they differentially receive benefit. Progressive tax is more of a gift. Adjusting progressive tax rates is not redistributing wealth.


Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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