Trump, Voodoo Economics and the Laffer Curve

It’s seriously annoying to WC that anyone listens to a claim that lowering taxes will trigger an economic boom which will “pay for itself” in increased government revenue. The claim is absolute garbage. It’s what George H.W. Bush called “voodoo economics.”

President Ronald Reagan pioneered the program, cutting taxes on his rich buddies. The economy stagnated.

President Bill Clinton raised taxes on the rich. Republicans predicted disaster. The economy boomed, creating more jobs than under Reagan.

President George W. Bush cut taxes. The usual Republicans predicted a “Bush boom.” The result was lackluster growth followed by a severe financial crisis, the worst recession since the 1930s.

President Barack Obama reversed many of the Bush tax cuts and added new taxes to pay for Obamacare. The economy boomed. More jobs were created in the private sector than under Bush.

Recent economic history offers zero evidence, not a shred of proof, for the claim tax cuts are an economic stimulus.

It’s not just a failure at the federal level, either. In Kansas, Governor Sam Brownback, slashed taxes in what Brownback called a “real live experiment” (that’s not a typo) in conservative fiscal policy. Governor Brownback promised that a tax cut would create an economic boom for Kansas. Alas, Brownback’s “experiment” triggered a fiscal crisis in Kansas but not a trace of an economic boom.

By contrast, in California, Governor Jerry Brown raised taxes. Republicans issued proclamations that the state was committing “economic suicide.” In fact, the state has experienced impressive employment and economic growth. Especially in comparison to Kansas.

Now we have President Trump claiming that his vaguely described massive tax cuts will “pay for themselves.” It’s that old voodoo economics again.

The so-called “Laffer Curve” is at the root of this Republican tax-cutting fantasy. The Laffer Curve says that at a zero percent tax rate, tax revenue would be zero. At a 100%, economist Arthur Laffer argued, no one would have an inventive to work and the tax revenues would also be zero. The “sweet spot” where you’d get maximum revenues at a minimal tax rate was somewhere along a curve between those two points. [^1]

An asymmetric Laffer curve with a maximum revenue point at around a 70% tax rate, based on estimates by Trabandt and Uhlig (2011)

An asymmetric Laffer curve with a maximum revenue point at around a 70% tax rate, based on estimates by Trabandt and Uhlig (2011)

The Laffer Curve was popularized in the United States following an afternoon meeting between Laffer and Ford Administration officials Dick Cheney and Donald Rumsfeld in 1974. Laffer reportedly sketched the curve on a napkin to illustrate his argument. The term “Laffer curve” was coined by Jude Wanniski, who was also present at the meeting. By all accounts, Laffer did not suggest a lower tax rate would raise more money; he merely demonstrate the principle.

It was Cheney, Rumsfeld and the ultra-rich wing of the Republican Party who seized on the Laffer Curve and claimed it showed lower taxes would raise more money. It does no such thing. But it was a brilliant, if economically absurd, excuse or cutting taxes on the rich.

In fact, The New Palgrave Dictionary of Economics reports that a comparison of academic studies yields a range of revenue maximizing rates that centers around 70%, as shown in the curve above. [^2] President Trump’s proposed tax rate is 15%.

WC isn’t the only person who feels that Trump’s economics are errant nonsense, a gift to his rich buddies. The University of Chicago School of Business polled 42 renowned economists. 37 responded. They unanimously rejected Trump’s claims. They described Trump’s claims as “implausible” and “a deficit stimulus.”

Getting 37 economists to agree on anything is pretty rare. But there’s agreement here: the Trumpster’s claim is false. It’s going to increase the deficit. It’s not going to boost the economy. All it will do is make the Trumpster’s rich buddies even richer.

Tax reform is needed. But not the “tax reform” this presidential clown is proposing.