Still ahead of the curve: Art Laffer rises as Obama hits America’s rich

 
Marc Sidwell
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WE SPEAK across the gleaming sweep of a boardroom table. Arthur Laffer has grabbed time for an interview while visiting CQS, a hedge fund. He is 70 this year, and the man who transformed the case for lower taxes with one sketch is in demand on this rare visit from the US. Today Laffer has other things on his mind as well. Of his six children, one daughter lives in London and, before we turn to economics, he explains how wonderful it is to spend time with her and his granddaughter.

But this modest family man is also one of the finest, fiercest defenders of the free economy alive, crackling with energy as he tears apart tax policies that ignore real outcomes. He smacks himself on the forehead as he declares, “Can you believe it? These people don’t know Econ 101. All these years I’ve been boring them with this stuff and they still don’t get it!”

Laffer is never boring. He sits forward in his chair, determined to make you see his point. He is in the City at the invitation of the Taxpayers’ Alliance, hosts of this year’s European Resource Bank congress for free market advocates. Laffer is a living legend in the policy world, the founding father of supply-side economics – and is therefore loved by some and hated by others in equal measure, depending on worldview. A crowd of over 400 members of the first camp came to the banquet at the Guildhall on Friday to hear him speak. The reception even received a rare public appearance from Lady Thatcher, whom he advised in the 1980s.

That advice had lasting consequences. Tax rates on high earners of 50 per cent may be punishing now but as he points out, things used to be far worse. “The world has moved on. You used to have 98 per cent tax on unearned income in 1974. That’s not coming back.”

That is because in 1974, at the Hotel Washington, Laffer grew frustrated while explaining his case to Dick Cheney. He pulled over a cocktail napkin and drew a quick graph (see above). The Laffer curve allowed a non-specialist to see how falling tax rates can increase receipts, thanks to greater productivity and compliance. This spring, those leading the successful campaign against a capital gains tax rise to 50 per cent regularly invoked the Laffer curve. At Friday’s banquet, every cocktail napkin sported a Laffer curve design.

“Taxation is a lot like beating,” suggests Laffer, his fingertips hitting the tabletop. “When you beat a dog, you know it’ll stay away, but not where it’ll go instead. Tax is the same way, you know people are going to shrink from it, but you can’t tell how. You need the lowest rate, the broadest base. It is incredible how responsive higher-rate taxpayers in the US have proved to tax cuts.” The data agrees: since 1974, America has reduced its highest earned-income tax rate from 50 per cent to 35 per cent, while tax receipts from the top 1 per cent of income earners rose from 1.5 per cent of GDP in 1978 to 3.5 per cent in 2007. The UK’s new 50 per cent tax rate is intended to raise an additional £7.5bn annually, but the Institute of Directors has predicted lower overall tax revenues will result in practice.

For Laffer, all this matters and not just for the sake of the rich. He breaks from economic analysis to paint a picture of the devastation unemployment causes in a household, the disappointment, the bitterness and anger it can breed. “The best form of welfare is a good, high-paying job. That’s what we have to encourage.”

“Poverty sucks! And being rich is really cool. I’m no Republican, I voted for Clinton twice and he was a great president, if a disgusting human being. Bush was terrible. I go with the supply-sider.”

Laffer dismisses the recent suggestion of economics Nobel prize winner Joseph Stiglitz that austerity measures in the UK will be a disaster. “He’s completely wrong. Ireland hasn’t continued the reforms that it needed. Government has no employee called Santa Claus. You know, my granddaughter gets this better than the professors. They just don’t like the answer, they go in trying to find that economics is wrong.”

The professors who dominate Barack Obama’s Washington dismay Laffer. Having spent many years as an academic, he knows the nature of the beast. He settles his glasses low on his nose and glowers over them, “In my classroom the right answer is whatever I say it is.” He relaxes again, “You have to listen to professors, but the last thing you ever want is professors running your country.”

Instead he thinks two ex-CEOs preparing for elections on 2 November in California are much more promising. Meg Whitman (eBay: 1998-2008) is running for Governor, and Carly Fiorina (Hewlett-Packard: 1999-2005) has the Republican nomination for US Senate. “I know them both. They’re great. Why not get someone who’s had success?”

The expiration of tax cuts at the end of this year makes Laffer bearish on the US economy for 2011. In June, he wrote that, “If you thought deficits and unemployment have been bad lately, you ain’t seen nothing yet.” I ask if he has changed his mind after President Obama’s recent statement favouring tax cuts for middle-income families, but not high earners. “He’s made it even worse! Only the rich can change the volume, composition and timing of their income.”

Obama’s mis-steps have been Laffer’s opportunity. As one of the last of his cohort still politically active, he finds himself facing an open target. “It’s like being invited to a Mexican piñata party,” he says with delight. “Only they forgot to blindfold me.” He courteously refuses to discuss current UK tax policy. “I’m not here to make myself unwelcome.”

Looking ten years younger than his calendar age, Laffer shows little sign of slowing down. He wants to scrap all federal taxes in the US, replacing them with a pair of flat taxes: a net excise tax and a tax on personal gross income. “Can you imagine the stars we could achieve, the jobs we could create?”

Armed with a powerful message, and clearly having the time of his life, the man who changed the world might just have a shot at doing so again. He thinks the facts of life are on his side. “We’ll get ‘em. Like Larry Gatlin says, ‘It ain’t rocket surgery!’ We all want to help the poor. The question is how to do it. You can’t love jobs and hate the people who create them.”

CV | ARTHUR LAFFER
Age: 70

Work: Founder and CEO of Laffer Associates. Author and distinguished economist. Served for Ronald Reagan on his Economic Policy Advisory Board: 1981-1989. First to hold the title of chief economist at the Office of Management and Budget.

Distinguished university professor of economics: Mercer University.

Professor at Chicago: 1974-76; USC: 1976-1984; Pepperdine University: 1984-1987.

Education: BA, Yale: 1963; MBA, Stanford: 1965; PhD, Stanford: 1972.

Family: Married, with six children.

Proudest moment: West Coast father of the year: 1983.