My Personal Note from Art Laffer

On June 19, 2019, President Donald J. Trump awarded the Presidential Medal of Freedom to Arthur B. Laffer. This prestigious award is the highest civilian honor, which may be awarded by the President to individuals who have made especially meritorious contributions to the security or national interests of the United States, to world peace, or to cultural or other significant public or private endeavors.

Who is Arthur Laffer?

Arthur (Art) Laffer is an American economist and author who first gained prominence during the Reagan administration as a member of Reagan’s Economic Policy Advisory Board (1981–89). Ronald Reagan was thought to have based his 1981 economic plan on the idea that cuts in marginal tax rates would increase tax revenues. Laffer is best known for the Laffer curve, an illustration of the concept that there exists some tax rate between 0% and 100% that will result in maximum tax revenue for the government. He attracted attention for his supply-side economic theories, which held that reductions in federal taxes on businesses and individuals would lead to increased economic growth and in the long run to increased government revenue.

History of the Laffer Curve

On December 4, Dick Cheney and a young economist named Art Laffer sat at a booth in the iconic Hotel Washington—the same hotel that appeared in scenes from the Godfather II just months earlier. Cheney was U.S. president Gerald Ford’s deputy Chief of Staff and his boss, Donald Rumsfeld, were looking for alternatives to Ford’s plan to raise taxes. According to Laffer, raising taxes was a bad idea. Instead, if Ford really wanted to encourage economic growth, and therefore government revenue, he should consider cutting tax rates.

Laffer drew the famous Laffer curve on a napkin, which showed that starting from a zero tax rate, increases in tax rates will increase the government’s tax revenue but at some point when the rates become high enough, further increases in tax rates will decrease revenue. This occurs because higher tax rates become strong disincentives against earning (and/or declaring) taxable income. Cuts in marginal tax rates could, therefore, increase tax revenues.

Controversial Economist

Most economists agree that there is a point of diminishing returns where raising taxes becomes counterproductive. According to dissenters, Laffer has spent years suggesting the idea that almost any tax cut for businesses and individuals could potentially pay for itself. The real controversy was not necessarily the theory, but rather where the American economy stood on the Laffer curve. Laffer’s theory and the evidence subsequently gathered, caused economists to examine more closely the incentive and disincentive effect of taxes.

My Note from Art Laffer

I studied the Laffer Curve and how taxes affect businesses and individuals as part of the CFA Institute curriculum. I learned that altering tax laws can have unintended consequences as people sometimes want to avoid taxes at all costs (creating more loopholes). There are also psychological effects when it comes to how people view taxes. Economists say a tax refund is bad because you’re giving the government too much of your money. However, if you ask the majority of Americans, they really want their refunds–perhaps as a way of forced savings.

I reached out to Art and asked him to pen something he has learned over the years. Thankfully he sent back his nugget of wisdom on his letterhead and not on a napkin:

“Always remember you make your money in bad times, yet you collect it in good times. Your friend, Arthur Laffer”

We will be sharing more notes of wisdom from famous authors, economists, and businessmen and women. In the meantime, feel free to check out my note from Vanguard’s founder, Jack Bogle.

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