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The Laffer Curve: The GOP's Favorite Fiscal Fraud Turns 40

December 31, 2014

The sun does not rise in the west and set in the east. Gravity does not make objects fall upwards. The earth is not flat. And tax cut do not pay for themselves.
Despite four decades of bitter experience--and incontrovertible data--to the contrary, Heritage Foundation chief economist Stephen Moore nevertheless took to the op-ed pages of the Washington Post to celebrate the 40 anniversary of the birth of the Laffer Curve.

I'd argue -- and not just because Laffer has been a longtime friend and mentor -- that his theory has actually held up pretty well these past 40 years. Perhaps its critics should be called Laffer Curve deniers.

Moore would have done well to first consult with some of his fellow economists before penning his ode to the immaculate misconception that is the Laffer Curve. According to a 2012 survey conducted by the University of Chicago Booth School of Business, the nation's leading economists would have given Stephen Moore's thesis an "F." In a nutshell, not a single one of the economists surveyed agreed that "a cut in federal income tax rates in the US right now would raise taxable income enough so that the annual total tax revenue would be higher within five years than without the tax cut."
In his comments, David Autor of MIT pointed out, "Not aware of any evidence in recent history where tax cuts actually raise revenue. Sorry, Laffer." Former Obama administration economist and current University of Chicago professor Austan Goolsbee put it this way:

Moon landing was real. Evolution exists. Tax cuts lose revenue. The research has shown this a thousand times. Enough already.

Enough already, indeed.

You'd don't need to take Austan Goolsbee's word for it that cutting taxes don't fuel increased economic activity so much that tax revenue exceed what it would otherwise would have been. This handy chart from Paul Krugman, and not Jude Wanniski's chicken scratch on a cocktail napkin, tells the tale. The gigantic Reagan tax cuts of 1981 and the Bush reductions of 2001 and 2003 only served to empty Uncle Sam's coffers.

As it turned out, after Ronald Reagan tripled the national debt with his supply-side tax cuts, George W. Bush doubled it again with his own. Reagan's performance would have been much worse, had he not subsequently raised taxes 11 times to help make up the shocking shortfall. Nevertheless, Moore, whose op-eds have been banned by the Kansas City Star due to his past misuses of data, proclaimed:

Contrary to the claims of voodoo, the government's budget numbers show that tax receipts expanded from $517 billion in 1980 to $909 billion in 1988 -- close to a 75 percent change (25 percent after inflation).

Sadly for Moore, the numbers show that federal tax receipts grew faster both before and after Reagan. As Krugman explained:

Real revenue growth 36 percent in the 8 years before Reagan, 26 percent under Reagan, 28 percent in the years following.

The history of the Bush years, too, shows that the arc of the Laffer Curve bends towards fiscal catastrophe. As this 2013 graph reflects, federal tax revenue did not return to its pre-Bush tax cut level until 2006.

As the Center on Budget and Policy Priorities concluded in 2009, the Bush tax cuts of 2001 and 2003 accounted for half of the deficits during his tenure, and if made permanent, over the next decade would cost the U.S. Treasury more than Iraq, Afghanistan, the recession, TARP and the stimulus--combined. So much for the claims of those Republicans who still claim that "tax cuts pay for themselves."

Unfortunately, "those Republicans" are virtually all of them. When President Bush declared in 2004 that "you cut taxes and the tax revenues increase," he was only reciting party orthodoxy then--and now. "I think we get revenue the way we've done it in the past that has been so successful in the past and that is tax cuts," former Texas Senator Kay Bailey Hutchison declared in 2009, "Every major tax cut we've had in history has created more revenue." Her colleague Jon Kyl (R-AZ), then the second-ranking Republican in the Senate, made the same point, telling Chris Wallace of Fox News, "You should never have to offset cost of a deliberate decision to reduce tax rates on Americans." Incoming Senate Majority Leader Mitch McConnell agreed:

"There's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue because of the vibrancy of these tax cuts in the economy. So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject."

But Arthur Laffer's supply-side snake oil didn't produce increased revenue, but instead red ink as far as the eye can see. And that's not the only by-product of Reagan and Bush's tax cut windfalls for the wealthy: they fueled the highest levels of income inequality since 1929. And despite all of the GOP mythology about "job creators," the U.S. economy grew faster, generated more jobs and produced better income gains when taxes were higher--even much higher.

These results, utterly foreseeable in Bush's day as in Reagan's, prompted Stephen Moore in 2003 to engage in what for him is a highly unusual activity: truth-telling. That January, he praised Bush's proposed $600 billion tax cut not because it would increase tax revenues, but because it was certain to diminish them and so "starve the beast":

One of the great, hidden values of President Bush's $600 billion tax cut, is that it could be the best (if not the only) way to end the boisterous spending spree on Capitol Hill of recent years...If anything can slow down the appropriations - and, alas, maybe there is nothing - it's a tax cut that prevents the drunken sailors in Washington from spending...History proves that tax revenues create spending and the lack of revenues help restrain spending.

Nevertheless, in 2013 Arthur Laffer and Stephen Moore brought their tax-cut Kool Ade to the states, touting Republican governors like Sam Brownback (R-KS) who had slashed rates as part of their "Red State Path to Prosperity." Predictably, the result was a financial cataclysm for Kansas. On December 26, the same day Moore's Washington Post op-ed appeared, Politico reported "GOP learns lessons from Sam Brownback's tax scare":

Republicans once idolized the tax-cutting superstar; now they look askance at him.

They--and all Americans--should look askance at Stephen Moore. If you need any more reason to laugh at Moore's Laffer Curve fawning, just go to Amazon and pick up a used copy of his 2004 book for a penny. The title?
Bullish on Bush: How George Bush's Ownership Society Will Make America Stronger.


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

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