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Financial Planning > Tax Planning > Tax Reform

Laffer keeps 'em laughing

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3/24/09 – San Diego, 8:30am PDT: I love an economist with a sense of humor. The ability to bridge complex analytical concepts with good humor always makes for great speeches, and Art Laffer didn’t disappoint in his morning keynote. The “Father of Supply Side Economics” and developer of the Laffer Curve opened by noting he only recently moved from California to Nashville, Tenn. He decided to move after the Governator went to the “dark side,” and Tennessee has no income tax. He then posed a simple question: If you raise taxes in Point A and lower taxes in Point B, what happens? Producers, generators of capital and businesses move to Point B.

“Am I over your head with this?” he asked. “No? Well apparently I was over the head of the California legislature.”

[Editor's note: As if to specifically reinforce Laffer's point, a great editorial on the backwards thinking of California's leaders appears in today's San Diego Union Tribune. It can be found here.]

Then he got serious, noting clients need advisors now more than ever. “It’s an old adage, but true. You make money in bad times, you collect in good times.”

Big surprise. He’s against stimulus packages. Here’s why: In February 2008, a $160 billion stimulus package was passed by Congress. Larry Summers noted at the time that if you receive money unexpectedly, you’ll most likely spend it. It will cascade through the economy, create jobs and benefit us all through the multiplier effect. Of course, the economy has completely tanked since then. Summers justifies it by saying, “Yes, but think of what would have happened had we done nothing.”

“This thinking is like bloodletting in the middle ages,” Laffer explained. “Take out a pint of blood. The patient gets sicker, so the reason must be that we didn’t take out enough blood.”

In any economy, Laffer continued, the income effect always sums to zero. This means if you give someone money, you must take it away from someone else. If the receiver spends the money and creates jobs, the person from whom the money is taken will stop spending and a corresponding number of jobs will be lost.

“Government has yet to discover this person called the tooth fairy. Not only do stimulus packages not stimulate, they actually hurt production and job creation.”

He then, depressingly, added up all the government’s unfunded liability, which now totals 100 percent of GDP. But tax revenue has fallen from 25 percent of GDP in 2001, to 16 percent of GDP in 2008. Anyone else see a problem?

As to a question specifically about retiring baby boomers and the latest Harry Dent Jr. prediction of a boomer-fueled depression, Laffer said he likes Dent as a person (and worked with Dent Sr. in the Nixon White House), but doesn’t believe in his economics.

“Demographics won’t matter. What will matter are the incentives in place to keep people working. I voted twice for Bill Clinton [very surprising], who was a horrible human being but a great president. I justify this by saying even if he wasn’t president he would still have been a horrible human being. So we got the best of Bill Clinton. He got rid of the retirement test on Social Security, he signed NAFTA over the strong objections of his own party, he re-appointed Reagan’s Fed chairman twice, he signed Welfare reform into law, and he cut the capital gains tax by the largest percentage in the country’s history. All of this incentivized people to work. This is much more important than the demographic’s numbers.”

He then ended by praising President Obama as a great American trying to do the right thing, but noted that the real genius of Ronald Reagan (Laffer’s former boss who he continually referred to as the “real” president) was that he followed Jimmy Carter.

After noting that high-tax, soak the rich proposals routinely pop up, “a renaissance of immense proportion is on the way,” he said, “which will most likely include some form of a federal flat tax.”


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