Laffer's Supply-Side Economics Staging a Comeback
Arthur Laffer, who helped Ronald Reagan write federal tax policy in the 1980s, is a force to be reckoned with these days at the state level. A large group of Republican governors is listening to him.
By Pamela M. Prah, Stateline staff writer
The last time economist Arthur Laffer was in the national spotlight, “Dallas” was a hit TV show; women wore big hair and even bigger shoulder pads; and Ronald Reagan was in the White House.
Flash forward three decades and Laffer is back in a big way, but at the state level. Sometimes called the father of supply-side economics, Laffer, now 71, hasn’t changed his views in any noticeable fashion. He makes the same argument he did when he was a member of Reagan’s Economic Policy Advisory Board: that cutting taxes boosts the supply of money to job-creators and thus makes for higher revenues.
And Republican governors are listening. From Florida to Kansas, governors have embraced Laffer’s theory that if tax rates become too high, they lead to less, not more, tax revenue. In economic circles, it’s called the “Laffer Curve,” even though the idea behind it was not his alone.
Laffer further argues that people and businesses flee states with high taxes to move to those with lower taxes. “It’s not rocket surgery,” says Laffer, who himself moved from California to Tennessee precisely because the state has lower taxes and is one of nine without an income tax.
Laffer has always had his detractors. George H.W. Bush once called the supply-side concept “voodoo economics,” and critics, including President Obama, still call it “trickle-down economics”: The benefits of cutting taxes for the rich are supposed to eventually trickle down as entrepreneurs retain more money to create jobs. Instead, opponents say, the tax cuts that Laffer promoted in the 1980s created massive deficits, helped the rich get richer, and led to a greater income gap between the haves and have-nots.
“It’s a simple theory,” President Obama said in late December. “It’s one that speaks to our rugged individualism and our healthy skepticism of too much government… But here’s the problem: It doesn’t work. It has never worked.”
In a recent interview with Stateline, Laffer insisted it does work. He credits supply-side ideas for a tripling in net wealth of U.S. households and businesses from $20 trillion in 1981 to $60 trillion by 2007. He says his recent research confirms that the states with lower taxes do better economically. For the past four years, Laffer and the American Legislative Exchange Council have ranked states’ economic competitiveness in “Rich States, Poor States,” an annual report that Governor Sam Brownback of Kansas has called “required reading for governors” since it shows “how economic vitality follows lower taxes.”
Laffer’s work is being touted in tax-cut campaigns not only in Kansas, but also in Oklahoma and Missouri as a brief for drastically reducing the state income tax or eliminating it altogether. He has visited all three states recently in different capacities to discuss research he says shows that states without an income tax generally enjoy stronger economic growth:
• In Kansas, Laffer is reportedly being paid $75,000 to provide tax advice to Governor Brownback, who is pushing to reduce and flatten the personal income tax.
• In Missouri, Laffer has worked with the free-market Show-Me Institute and supports a bid from Let Voters Decide that would allow a statewide vote on replacing the individual income tax with a higher sales tax, up to 10 percent.
• In Oklahoma, Laffer worked with the Oklahoma Council of Public Affairs on a report that helped shape Governor Mary Fallin’s proposal to phase out the state income tax.
Laffer also served on Florida Governor Rick Scott’s tax advisory board. He worked with Ohio Governor John Kasich last year to abolish the estate tax, and is doing the same now in Tennessee. He was active in supporting Indiana Governor Mitch Daniels’ efforts to make Indiana the 23rd “right-to-work” state, in which it will be harder for unions to recruit and retain members.
Right-to-work states without an income tax “are going like gangbusters,” says Laffer, who first made his mark in state policy in 1978 with his involvement in Proposition 13, the historic initiative in California that put a strict limit on property taxes.
Do the numbers add up?
Supply-side economics has always been controversial and widely debated. Laffer’s latest efforts are no different. Carl Davis, senior analyst at the Institute on Taxation and Economic Policy, a liberal think tank in Washington, D.C., calls Laffer’s tax cut idea “snake oil.”
In the study for Oklahoma, Davis says that Laffer makes no effort to account for factors besides taxes that might affect economic growth, including energy, which several of the nine states that lack an income tax have, including Alaska, Texas and Wyoming. His group calls Laffer's analysis flawed and junk economics.
In a recent editorial, retired Wichita State University economist William T. Terrell calls Laffer’s claims “empty.” He says other research suggests all nine of the no-income-tax states enjoy revenues from sources not now available to Kansas. “This is what enables them to abandon personal income taxes,” Terrell argues.
Critics also point out that Laffer’s calculations measure each state’s tax rate by combining the top marginal state and federal rate in each state. This decision to include federal tax rates in a study of state tax policy muddies the waters, they claim.
“Without this flawed regression analysis, there is not even the semblance of an argument left to support the idea that eliminating the income tax will spark the miraculous economic benefits that Laffer claims,” writes David Blatt, director of the Oklahoma Policy Institute.
Recent studies likewise appear to debunk Laffer’s theory that the rich flee high-tax states, including 2011 research that looked at tax rates and migration in New England and New Jersey.
Even moderate Democrats aren’t buying Laffer’s proposal. “There are a lot of economic philosophies out there,” says Kentucky Governor Steve Beshear. “By far the biggest issue for companies looking to locate is the quality of the workforce,” he told Stateline recently. Beshear won his second term last year by defeating state Senate President David Williams, a Republican who wanted to eliminate the state's personal and corporate income taxes, in part to compete with its no-income-tax neighbor Tennessee.
For most Democrats, the key to reviving state economies is less likely to be tax reduction than government spending. But Laffer rejects that idea, lambasting the “spending binges” of both Obama and President George W. Bush, the Republican who preceded him.
While Laffer is associated with Reagan, he unabashedly says his other favorite presidents are Democrats Bill Clinton and John F. Kennedy, for what he calls their pro-growth policies.
“I hope it’s not Republican-only,” he says of interest in his research. He notes that he worked with Democrat Jerry Brown on a flat tax proposal when Brown, the current governor of California, ran for president in 1992. He hopes Brown reads his upcoming book, “Eureka!: The Way to Fix California.” The book calls for replacing hundreds of state and local taxes with just two flat rate taxes, one on net business income and another on personal and adjusted gross income. “Just the complication of the California tax code is enormous,” Laffer says.
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