On vacation last week, my only regret was that I missed an opportunity to comment on a column in the Wall Street Journal by Art Laffer, inventor of the Laffer Curve, which has done more damage than any other geometric shape in history. Famously first drawn on a restaurant napkin for the benefit of the late congressman Jack Kemp, the curve purports to show that you can increase government revenues by cutting taxes. And indeed you can. If you reduce taxes from 100 percent to 99 percent, you will bring in more money than if you leave them at 100 percent and remove everybody's incentive to go to work at all. Back in the early 1960s, when marginal tax rates were as high as 90 percent, cutting them may well have increased government revenue by making tax shelters more trouble than they were worth. The question is whether this tells you anything useful about the effect of raising and lowering taxes in the real world of today.
What's interesting about last week's piece is how little the argument has changed--like, not at all. I needn't have rushed home from Spain and missed my play date with Michelle and Sasha. Laffer is frozen in time, still dusting off a quote someone found years ago from John F. Kennedy, still dating his findings from 1978. He cites "Presidents Johnson, Nixon, Ford and Carter." He talks about "the Hoover/Roosevelt Great Depression." True, the traditional picture of Tip O'Neill as the symbol of liberal excess has been replaced with one of Nancy Pelosi (a big aesthetic improvement).
Nothing that has happened in the past four decades has caused Laffer any doubts. Bill Clinton raised taxes and produced a surplus? Laffer ignores Clinton's general tax increase and reinvents him as a tax cutter because he "cut the highest marginal tax rate on long-term capital gains from the sale of owner-occupied houses to 0% for almost all home owners." Laffer does not pause to consider whether perhaps, in hindsight, the housing sector is not the best poster child for the prosperity of the Clinton era.
And George W. Bush? He cut taxes on upper incomes and Clinton's surpluses turned into deficits. Are those two facts completely unconnected? Not a word about George W. in Laffer's piece.
Above all, the statistical flim-flam is the same. Laffer is still performing two ancient and long-exposed party tricks. The first is to note that a cut in some particular category of tax is followed by an increase in revenue from that category. The subject is usually capital gains, now taxed at a maximum rate of 15 percent. (In 1978, the top capital gains tax rate was 70 percent.) Well sure. If they gave a huge tax break to people named "Laffer," people would change their names to "Laffer." Tax revenue from people named Laffer would go up. Total tax revenues would go down.
The other statistical nostalgia trip is Laffer's boast that between 1978 and 2007 (years he now describes as an "era of ubiquitous tax cuts," although my memory is that conservatives, especially the Wall Street Journal, did not regard them this way at the time) the distribution of the tax burden became more progressive. "Income tax receipts from the top 1% of income earners rose to 3.3% of GDP in 2007...from 1.5% of GDP in 1978. Income tax receipts from the bottom 95% of income earners fell to 3.2% of GDP from 5.4% of GDP over the same period." But the reason high-income people paid a bigger share of the taxes is that they made a bigger share of the income. From 1980 through 2005, in fact, the share of all reported income going to the top 1 percent more than doubled, to 21.8 percent. According to Laffer, over roughly the same period their share of the taxes also more than doubled--but from only 1.5 percent in 1978 to 3.3 percent in 2007. The share of their own income going to income taxes plummeted, from 34.5 percent in 1980 to 22.4 percent in 2007.