Dr. Art Laffer on Taxes, the Government, and the Economy

Monday, August 17, 2020 - Dr. Art Laffer discusses the levers of influence that the government has to pull to influence the economy. He also touches on how COVID-19 is impacting the economy.

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Dr. Art Laffer has been called the Father of Supply Side Economics. He was a member of President Reagan’s Economic Policy Advisory Board, and is perhaps best known for developing the Laffer curve.
Dr. Art Laffer has been called the Father of Supply Side Economics. He was a member of President Reagan’s Economic Policy Advisory Board, and is perhaps best known for developing the Laffer curve.

Dr. Art Laffer has been called the Father of Supply Side Economics. He was a member of President Reagan’s Economic Policy Advisory Board, and is perhaps best known for developing the Laffer curve, an illustration of the idea that there is some tax rate between 0% and 100% that will result in maximum tax revenue for the government. He served as economic advisor to Donald Trump during his 2016 campaign, and was awarded the Presidential Medal of Freedom in 2019. Today, he will discuss how the economic climate has been affected by COVID-19. 

Dr. Laffer discusses two economic principles he thinks are necessary in order to understand the current economic situation. Firstly, government spending requires taxation and redistribution of resources. Secondly, he believes that redistribution always reduces income and production and therefore even though some taxation is required – especially to help those suffering hardship – government should endeavor to keep taxes as low as they can. 

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In This Episode

Read the transcript below and use the table of contents to jump to topics that interest you.

Opening Remarks

Dr. Art Laffer:
Thank you very much, Ted. It's a pleasure being with all of you. By the way, you should mention that Tennessee is the lowest tax state in the nation, we have no income tax whatsoever, we have eighth lowest property tax. In fact, if you look at the total tax burden, we're really, really low, and I love low taxes to be honest with you, work is so much more fun with lower tax. That's my view of the world. Let me if I can, I want to touch on a few things with you on the economics and what's happening with COVID-19, and then just throw it open for questions if that's okay, Ted. I'd love to do it that way.

The COVID-19 caught us all by surprise, obviously, I focus on the death rate, that's the one that really motivates me in my thinking about COVID-19. If you'll remember, I think it was early April, the death rate was about two and a half thousand a day. That number is steadily come down to where now it's in the 500, even lower than 500 a day. So it is coming way, way down, and that's all very, very good news. Other very good news is, and this I can tell you, I was chairman of the Board of Centennial Hospital here in Nashville. That's the flagship for HCA, for those of you don't know.

And we were very worried about ICU beds and all of that, even though the US started the process with the largest number of ICU beds per 100,000 population of any major country in the world, there was lots of fear that the system would be overrun. That has not only not happened, it appears to be that the ICU beds, we have plenty of flexibility in there. It's also apparent, at least it appears to be, that the virus, coronavirus is getting somewhat weaker as is normally the case with a virus. They don't do very well when they kill their hosts, so they evolve very quickly.

And lastly, a lot of the medical stuff that's been occurring in a very rapid pace has really redounded very much to the benefit of curing people with COVID-19, they know how to do it. For example, the intubation process has been greatly reduced, they're using now ECMO rather than intubation, which has been very beneficial in life saving. So the system, everything's evolved very well. Given that we have COVID-19, I could not be more excited about the progress we've made and from watching Maria Bartiromo with Mike Milken, it also looks very much like there's some really promising vaccines and promising better treatments are coming.

So you wanted me to start off with COVID-19 and what is the damage it's done, it's done a lot of damage to the US economy, but that economy, in my view, has been rebounding back very nicely. I'm always a huge believer in the power of incentives and that people's incentives if correctly placed will behave really, really well and really quickly. If you drop a $20 bill on the floor, it's rarely there for more than a second or two before someone picks it up. And what we saw a month ago was a 2.5 million increase in employment. And then this last month we saw 4.8 million, which is right in line with the thoughts that I was having.

Now, let me do a couple of things where I think there are problems, and by the way, just so all of you know, I love your group, No Labels. I think it's completely wonderful that you work that way. Jared Polis as some of you may know, was my intern, I'm on all of his family boards and I visited him in Colorado Democrat. He's going to probably be the first governor to eliminate the income tax in any state. So he's a clear thinking, solid guy, Democrat or Republican, it really doesn't matter, good economics is good economics.

Also, some of you may know that I was Jerry Brown's economist when he ran for president, that 13% low rate, broad-based flat tax was my baby. So I've worked with Democrats and Republicans, the Kennedys as well. I just like low taxes, I like economic growth and I like prosperity, and I don't really care what label it comes other than those labels. But let me if I can go through two economic principles that I think are really critical for understanding what's going on in the economy and how policy responses should be and how they haven't been.

The first one is to understand that government spending is taxation pure and simple. Our government doesn't create resources, government redistributes resources. All the money they give to one person they have to take from someone else, it's a double entry accounting system, you have to follow your T-accounts. This may not be obvious or intuitive to everyone, there are a lot of economists who believe that government spending is stimulative. It's not. And let me if I can try to explain it to you quickly.

Good economics, if it's good economics is scalable, it should apply to the US with 330 million people or to China with 1.3 billion or Luxembourg with four people. Good economics really should be scalable and easy. Following good economics in the 330 billion person world is very difficult because you do can't follow the T-accounts. You've got credit default, swaps, you've got Chinese capital flows, you've got multipliers philosophies, but when you realize it's scalable, when you look at a small scale, you can see it very easily.

Imagine a two person world, farmer A and farmer B. And that's it, no one else, just those two farmers, A and B, there's nothing else in the world except those two. If farmer B gets unemployment benefits, who do you think pays for them? And obviously the answer is farmer A. It is very clear that government spending is taxation, and that you got to understand, that doesn't mean you don't do government spending, you do do government spending, but you've got to reflect and understand there's a cost involved with it. The other one I want to just touch on with you for a second, and again, it's just pure math, it's not ideological, it's not left or right, it's redistribution.

Redistribution always reduces income. Let me just show you theorem here intuitively. Redistribution occurs when you take from someone was a little bit more and you give to someone who has a little bit less. Now, by taking from someone who has a little bit more, you reduce that person's incentives for producing, and that person will produce a little bit less. By giving to someone who has a little bit less, you provide that person with an alternative source of income other than working, and that person too will produce a little bit less.

The theorem mathematically is very straightforward, whenever you redistribute income, you always reduce total income. And again, that doesn't mean you don't do it, it means you have to understand and reflect on the costs involved when you do do redistribution. Now, the lemma from this theorem is also weakly as intuitive, the more you redistribute, the greater will be the loss in income. And the limit function of this theorem is equally as it is as obvious, is if you were able to completely redistribute so that everyone actually came out exactly the same, there would be no income whatsoever.

Let me show that to you. If you're going to have exactly equal results for everyone, if you're going to be the Saez, Piketty, Zucman people of the MIT group, what you have to do is you have to tax everyone that makes above the average income 100% of the excess, and you have to subsidize everyone below the average income up to the averaging. Only in that way, can you guarantee that everyone will come out exactly the same. Now, if you actually did that, if you actually taxed everyone above the average income, 100% of the excess, and you actually subsidize everyone below the average income up to the average income, I will stipulate today counselor, everyone will come up the exact same at zero income, period.

Now, with these as your basis, when you look at something like the economic problem that was done by the coronavirus, and you look at the things, we had the CARES Act, which is about $3 trillion worth of spending, most of it, almost all of it was redistribution. There was a very good portion of that which was medical, but it was by no means the lion's share of the spending. I disagreed very much with the CARES Act on the redistribution. There may have been some of that you really wanted to do, but the PPP and some of these others in the unemployment benefits, 600 bucks per week, I thought were way over the top, way beyond the pay, and should not have been done.

When we look at the second round of stimulus, that's supposedly coming out of Washington, there were a couple of things I've focused on with the president and with the team. The first one is the payroll tax waiver. And let me explain to you why I really support the payroll tax waiver and why I think everyone, Democrats and Republicans that should support it, is that the payroll tax waiver, if you want more employment, what you want to do is tax employment less. What the payroll tax waiver does is eliminates the payroll tax, let's say through December 31st, that would increase the wages received by workers by 7.65%, which is the employee contribution to the payroll tax.

This is both Medicare and social security, and therefore making it more attractive for employees to work. The second thing it does is it reduces the employer contribution, reduce it or eliminates it, which is also 7.65% of the payroll tax of all employers, which makes it much more attractive to hire workers, to retain workers and to expand the use of workers because it's much less costly. So it increases the returns to workers and reduces the cost to employers, which is a huge incentive effect. Now, by making a terminal on December 31st, what it means is that we need that production now. So if you have a time limit to when that can happen, you will pay up people, businesses accelerating their income and employment to the present, which will jumpstart the economy and get it going, which is exactly what I think we should do.

To do that, one of the other nice things about the payroll tax waiver is the payroll tax is paid by every single employee in America, no matter what company they work for, and the payroll tax is paid by every single employee and employer, which means that there are no picking winners and losers on the part of the government, which is in my view, one of the biggest problems is corruption in government of trying to pick winners and losers, is not what government should be doing. It hits every employee and every employer equally across, it is the most broad-based one that you can do.

The last one I want to hit on with you is, I did a piece with John Childs probably about six or seven years ago when we looked at the cost of government getting a dollar's worth of money so they can spend it. And what we looked at now in this one was the income tax, both corporate and personal, but we looked at it, we looked at all the lawyers, the accountants, the deferred income specialists that all the taxpayers have to pay, all the auditing departments, accounting departments, all of these things in companies, which they have to use there. We then used the costs of audits. These are all of the out of costs, out-of-pocket costs for collecting a dollar's worth of taxes that can then be spent.

The number we came up with roughly speaking is between 30 and 35 cents out-of-pocket expenditures for every dollar, tax dollar collected that can then be used for spending. Which means that a tax reduction dollar is about 35% more efficient and is a government spending dollar. So therefore, I'd much prefer to see a waiver of a payroll tax than I would a spending program because each dollar of static revenue loss of a payroll tax is about 35% more efficient than is a dollar of spending, so that's where I am on the payroll tax. I also want to see transparency in medical prices. I can go through that with you.

I think you're all aware of the executive order that the president did on this that I think is just wonderful. We're trying to get that into legislation form for the stimulus package there. I was very involved in that process of getting that. There are a few other things you can do, 100% expensive capital purchases, and Larry Kudlow has one on capital gains, but these are the ones to really get the economy going. And with that, I'll just throw it open, Ted, I don't know if this is what you guys wanted or if this is what you guys do, but there you have it.

How are we going to reduce the deficit?

Question:
I'm in bit of a deficit hawk. Our accumulated deficit before COVID was what, about $23 trillion?

Dr. Art Laffer:
Something like that.

Question (cont'd):
That'd be about 29 trillion, give or take.

Dr. Art Laffer:
Or if we're lucky.

Question (cont'd):
If we're lucky. We can't keep adding a trillion dollar deficits year after year, especially when the government is spending four trillion and we're taking in three trillion and borrowing the other trillion. How are we going to get it back down? First of all, do you care if we never get it back down? Or if we do, how are we going to get it back down?

Dr. Art Laffer:
Let me say, I do agree with you, the deficits and debt are problems, but I don't think they're nearly the size of the problem that you're describing. When I look at debt and when I look at deficit, most people look at it relative to GDP. You've got, probably GDP today is 21 trillion, somewhere in 22 trillion. Our debt was about 80% of GDP prior to this last year. Today, it'll be probably 115% of GDP. You never should compare, in my line, compare a stock with a flow or a flow with a stock. You want to compare stocks with stocks and flows with flows.

The way I like to look at the US national debt is to look at it relative to US wealth. If you get it compared to the US wealth, and here we have the Federal Reserve board numbers on this. While the number is much larger than I would like it to be, Andrew, it's not scary at all. A US debt to US wealth is still well within the range of being worked on and being kept. I would prefer to see it lower rather than higher. The other way you can look at the US debt is look at US debt service and compare it to US GDP, that's a flow with a flow. If you look at that, US debt service relative to GDP today is much lower than it was in '81 or '82.

And so therefore, my view is debt is a problem but it's much less of a problem than you're referring to. And I don't think it's an urgent problem in the sense that we have to solve it this week or this year, or even probably in the next five years.

Question (cont'd):
The only difference is, in '81, '82, the interest rate was about 11, 12%, and today, the interest rate is two or 3%.

Well, that's very true. And also, the interest rate in 1982 or '81 was also had a huge capital pay down of the national debt because inflation was reducing the real value of the national debt as well. So, if you want to think of it alternatively, inflation was expanding the US net worth very rapidly, you want to think in nominal terms. But right about now, I think really the right thing to do is look at the ratio of those. And I think that ratio would tell us that we're not on the edge of a cliff we're it'd fall over. I just don't think it's panic stuff, although I'd really much rather see it much lower, but I think you can't solve the national debt issue without having economic growth.

So as far as policies go, I think the policies about CARES Act were wrong. I don't think they should have been done. I think we should be running a much better budget and spending a lot less than we are, but I'm not panicked about going over at place.

Are you still supportive of the carbon tax?

Question:
I had a quick question. Are you still supportive of the carbon fee? Before we refunded carbon fee and do you see it happening?

Dr. Art Laffer:
You're talking about a carbon tax?

Question (cont'd):
Yes.

Dr. Art Laffer:
Yeah. I totally support a carbon tax as long as it is 100% offset by an income tax or a payroll tax reduction. If you want to solve global warming, what you want to do is raise the relative price of carbon so people use less of it, but you don't want to destroy the economy. Al Gore and I did a paper and a lot of work together on this, and Al Gore has always been perfectly wonderful on the carbon tax. He's always said that he wants the carbon tax, but completely offset by payroll tax rate reduction or an income tax rate.

The problem I have with a standalone carbon tax is it would do enormous damage to the economy if it were done by itself, but a tax on carbon in my view does far less damage to the economy than does a progressive income tax, or then does a payroll tax. Therefore, as long as we have a carbon tax offset by payroll tax cut or an income tax, I would be more than 100% supportive. I have tried like Matt, to get Democrats to do that without anything else, just a straight one for one trade off, and I haven't been able to get it done.

To be honest with you, I got White House to be very close to it, he's a fellow Yalie, but he just wouldn't go all the way. He just won't. He's got to put in political stuff in your redistribution or something else in there, a payroll tax, straight swap would be good for the economy and it would be good for the environment. I just don't see any downside.

Question (cont'd):
I've been there for more than 10 years now and pushing this on the democratic side and so I always try to get... There is some push back now on my side, but the bigger issue is getting Republicans on board.So I appreciate your work..

Dr. Art Laffer:
There were a lot of Republicans I know who are on board and in the House I've been on board, but as long as it's a clean bill, it can't have all the other stuff in it, and White House wanted to put five things on redistribution and people who would be facing higher grocery prices because of more gas, but you just can't get into all the other stuff, just do a clean one and let's get the environment and the economy solves together. This economy does not need external pollution, it just doesn't need it. It'd be really great to do it without pollution, and you can do that with a swap.

Taxes and Incentive

Question:
I would like to pose my question in this format, assume that I'm a very successful businessman and make a great deal of money, and I'm taxed at, we'll make up a number, 20%, and I keep 80%. And now there's income tax bill, and the following year, I'm taxed at a rate of 25%. What do you base your statement that I therefore would make less money, would have less incentive? Are you making a psychological statement? In other words, can you offer some proof for what I think is more or less just a straight averment. Thank you.

Dr. Art Laffer:
Let me just do theory with you first as economics is all about incentives and people like doing things they find attractive and they dislike doing things they find unattractive. One of the things that makes an activity less attractive is taxation, therefore on a principle level, higher taxation will make that an activity of working, maybe not for you personally, but for a large class of you would really shortly will. What you want to look at is not the tax rate itself, what you want to look at is your retention rate.

People don't work to pay taxes, people work to get what they can add to tax. And let me give you the example of John F. Kennedy, and so I can use a much bigger example than just the 20, 25%, which is small. When Kennedy came into office, the highest marginal income tax rate was 91%, the lowest rate was 20%. Now, he cut that rate from 91% to 70% and he cut the lowest rate from 20% to 14%. By cutting the rate from 91 to 70%, that's a 23% cut in tax rate. By cutting the 20% to 14%, that's a 30% cut in the lowest tax rate. You follow me? When you get the recording, you can go through it more carefully.

The real reason here, the real incentive is the incentive. Think of a guy in the 91% tax rate. He earns a buck, he has to pay 91 cents in taxes. His incentive for earning that dollar is nine cents on the dollar, that is insane. After Kennedy's tax cut, he went from 91 cents to 70 cents, which means now for earning a buck, he gets to keep 30 cents. He goes from nine cents on the dollar to 30 cents, that's a 230% increase in incentives or 23% cut in rates. That's the 10 to one beneficial cost ratio. The guy in the lowest bracket goes from 20 to 14%. That means that before the tax cut, every dollar he made he kept 80 cents. After the tax cut, every dollar he made, he kept 86 cents.

That's a 7% increase in incentives, 30% cut in rates for that guy. That's a benefit cost ratio of one to four. What you really want to do is match it so that the incentive of that dominates the static effect. And in your case, the going from 20 to 25, that will reduce your incentives to work. Now, we have tons of econometric and literature. The academic literature is absolutely clear on this across the board that incentives really matter and they matter a lot. I can give you anecdotes all day long, but the academic literature, and in fact, if you'd like it, I've got a compilation of about 450 academic articles with anecdotal bibliographies, if you want them.

But all of the people, Romer all of them find that there are very powerful increases in employment effects on a macro side for tax rate reductions and going to a flatter tax. Going to zero tax, no, but the more flat your tax is, the more growth you're going to have, the more output, more prosperity. I hope that gives you a quick one. And if you want articles on this, I'll be glad to share it with you, just email me.

Measuring Federal Assets vs. Liabilities

Question:
Dr. Laffer, I really, really appreciate your insight and comments here. I was very interested in your comments in regards to the debt. Serving on the Budget Committee, hearing from the head of CBO who talks about a sovereign debt crisis that will occur in the next 10, 20 years if we don't change a trajectory. What was interesting to me in your comments was, I've always felt like measuring against GDP is like taking your liabilities on the balance sheet and measuring it against your income statement and you described that. And what I was trying to determine, and I don't know if anyone's going to look at this is, would it make sense to match liability against federal assets, which are pretty significant when you look at land all of that? You're a little different, you're talking total wealth across the country, and I don't know exactly what that number is, honestly, but I'm just, A, wondering what your thought is on that. Shouldn't there be a better report in regards to a real balance sheet on the deficit. How would that change our views about the debt?

Question (cont'd):
And then secondly, if you're not too concerned now, you're concerned but you don't think it's an immediate crisis. At what level should we really be worried? If you're measuring against total wealth in the country, at what level should we be concerned?

Dr. Art Laffer:
I like your question a lot. I was the first chief economist at the OMB when it was formed in 1970. I was George Schultz's right hand person. And I looked at the balance sheet of the US, which is the right way to do it, which is what you're talking about here. And the balance sheet of the US is one way of doing it. I also looked at the wealth. The wealth numbers are published by the Federal Reserve Board. They publish them every, I think every three months on that. We have a very good series of US wealth going back. We do not have a good series of US government-owned assets, because frankly, there are a lot of things in there that we don't know about.

We used to have something called the [Salt and Stall Report 00:28:02] which if you looked at an actuarial balance sheet of the US which took unfunded liabilities into account and all of that. We don't have the Salt and Stall Report any longer, the government decided not to publish it or do it anymore, which is a crying shame. And that would give you a lot of fodder if you had that report. But what you want to do, as you say very clearly, you want to compare flows with flows. What is the cost of servicing the debt and what is the revenues? If you want to use tax revenues, that's fine. If you want to use the GDP, that's fine too, I use both. Or if you want to use balance sheet. Balance sheet, that would be fine too. The bad stock versus stock, which was the total US debt compared to total US wealth. That's the right way to go.

The Rogoff issue, this time it's different in all of those. I think they're just plain wrong. We are not in a crisis again. I would prefer to be less debt, but remember, debt is not a problem, it's the spread that is the problem. Let me give you an example here. I'm going to let you borrow all you want risk-free at 1%, and I'm going to let you lend all you want risk-free at 12%. How much should you borrow? Everything you can get your hands on. Now, reverse those numbers. I'm going to let you borrow all you want at 12% and let you lend all you want at 1%, how much should you borrow? Nothing.

Borrowing is neither a good nor a bad, it's a tool. What is important here is the spread. Now, when we came into office and God loved America, the clouds parted the sunshine forth on the earth, and we had green fields, the animals, they multiplied and the children danced in the streets. When we came into the US with the real president, Ronald Reagan, we found that the four stooges, Johnson, Nixon, Ford and Carter, had run our.... By the way, the largest assemblage of bipartisan ignorance ever put on planet earth, they had run the US into the ground. What we did is we did just like a venture fund, just like an equity fund. We took a company that had been run into the ground, we dug in to the trash heap.

We found this little and pre-mature, we polished, we put it on the side of our building that said, "USA, America." We then sat there and brought it in. We cut taxes dramatically. We sold the products. We borrowed lots to build it up, and just prayed to God that they asset value would appreciate, and it did. We grew the US, and it was an amazing change. US debt to US wealth shrank dramatically when the real president was in office, and we grew like that. It did the same thing under Bill Clinton, by the way. Clinton was one of the greatest presidents I've ever thought. Not a great person, by the way, I'd never let my daughter intern in that White House, but he was a great president.

I voted for Clinton twice, and publicly did all... The problem is, what you want to do is make sure your spread is right. You want to borrow cheap lend dear, and then you can do it. You don't want to borrow all this money at high interest rates and use it to pay people not to work, what you want to do is borrow at low rates and pay people to work and get the economy growing. It's all about the spread. And unfortunately, with W. and Obama and with the four stooges, the spread towards the wrong direction. With Reagan, with Clinton and I think with Trump, the spread is in the right direction. I think we're really borrowing cheap, and we're letting this economy start to grow. The tax bill and all that was just phenomenal, with the executive order on healthcare...

I think we're going in very pro-growth policies, except when we come to the CARES Act and what probably will happen with the next team.

Can one get on the "left side" of the curve?

Question:
Let me first acknowledge that the reason you've never heard of Jackie Norton is because she's not really a member of No Labels, and I'm just honored to be on this call on behalf of Don Budinger. But I'm also honored to be on this call because Dr. Laffer, I met you way back in the early '90s when I was the Deputy Chief of Staff to Governor Fife Symington. And as you will recall, you helped him and his administration start a tax cutting commitment that continues to this day with the help of Monday's guest, Grover Norquist. And our current governor says we will continue cutting the income tax for as close to zero as possible.

So, you are a legend in Arizona. But the question on behalf of Don Budinger is, can the curve, can one get on what he calls the left side of the curve? And apparently he's had this conversation with you before, so I don't think it will catch you off guard.

Dr. Art Laffer:
Well, what we did with Fife... Fife was one of my dearest friends and we were going to eliminate the income tax in Arizona over eight years, we did it on separate bills, so we wouldn't be caught with a big deficit and then have to reverse and do all of that. As all of you know or some of you may know is after five years, Fife was indicted, he was convicted, he was thrown out of office. We had almost reversed the Malford, Babbitt and [inaudible 00:33:32]administration, and we had everything rolling. We were blessed by one huge, huge factor.

We were blessed by Pete Wilson being in California, opposing solar systems of economics to leave California, they landed in Arizona, which was nice. But no, states are way beyond the curve and most states are, and that's why I moved to Nashville, is that their taxes is incentive business. You won't believe this, but once upon a time, Detroit was the Paris of North America. My mom and dad used to take me in the '40s by train up to Detroit, Michigan for vacation. Train station there was the Taj Mahal.

In 1950, Detroit had a population of 1.85 million, today it's less than 600,000. And that was all done by Matt Romney, Romney's dad. George Romney put in the income tax, they put in the corporate tax in the city, and well, you've seen the spiral. These spirals are impossible to reverse once they start and you can see it in St. Louis, you can see it in Cleveland, my hometown, you can see it all over the nation. And that's what we hope does not happen to Arizona, is that Arizona has done pretty well, but boy, was it bad before Fife got in?

Educational and Health Care Effect on Overall Wealth

Question:
The question I have is really distribution wealth always a net negative on growth. And the question really is around education and health care. If you really improve the educational outcome of, take an example, one child. That child becomes more productive, generates more wealth for the economy overall over a long period of time. And so you do that overall across the United States. [inaudible 00:35:40] which is funded by reducing the wealth in general like net positive for the economy or healthcare, you can address both.

Dr. Art Laffer

Let me put government into perspective from my standpoint, when I look at it, there are three things that matter, how you can collect your taxes, how then you spend the proceeds and how much you collect and spend in total. Now, when you look at taxes, and I'm going to be a little bit flip here, but forgive me, we don't have hours. All taxes are bad, but some are worse than others. What you want to do is collect your tax revenues in the least damaging fashion for the economy, one. Number two, you want to spend the proceeds in the most beneficial fashion for the economy.

When the damage done by the last dollar of taxes collected is a... less than the benefit done by the last dollar spent, it stop already. Any government larger than that is too large and should be shrunk, any government smaller than that is too small and should be expanded. Now, putting your question into this context, if I may, there are lots of things that government should be doing and does really well, and you've mentioned a bunch of. All these things with major externalities, education, healthcare, highways, defense, you could go on, are perfectly natural areas for government to be involved in and should spend resources doing, and they should balance the costs and the benefits to the society.

And there's some that aren't economic. Let me just... None of us wants to see someone starving or dying on the streets, even it doesn't help GDP. For God's sakes, we're humans let's bring them back in and help them. But what you've got to do, and if I may say, make sure you've clear eye, make sure you don't exaggerate the benefits and ignore the cost. A good person who does really truthful help is clear-eyed and warmhearted simultaneously, but you can't be a warm hearted, generous person without being clear-eyed simultaneously.

It does no one any good to lie about the costs and do something that's going to actually create the very problems you want. Now, when I look at some of the problems we have in society, some of them are actually created by government spending, we're creating the very poverty class. I wrote enterprise zones back in 1974 in the South side of Chicago because I saw a problem, what was happening in the inner cities. My neighborhood was... well, the story is that when my family and I moved to Southern California, my old neighborhood was no longer integrated. I was living in that neighborhood all my life there.

I wrote enterprise zones where if you want win in the inner cities, what you want to do is have tax free zones where you can attract businesses coming, and person with no payroll tax for the employer or employee in the enterprise zone as long as the person's principal residence was the enterprise zone, as long as the business's facility was the enterprise zone. No income tax of up to $50,000 a year as well, same criteria. Thorough review, building codes, regulations, restrictions, and requirements, to make sure that they're not anti-economic growth. They're not just union put in things to create monopoly.

And lastly, what I had in my first proposal was to get rid of the teenage minimum wage. These kids they aren't worth 15 bucks an hour, I don't know if you've been in the inner cities, but they're not. And they won't get that first job at 15 bucks an hour. After being unemployed for a year or two, they become unemployable, after being unemployable for a couple of years, they become hostile, then you have to spend a fortune protecting yourself from them. My proposal was get rid of the teenage minimum wage, which I used to call the Black Teenage Unemployment Act, and get rid of that to let these kids come in the way I was trained to earn above the minimum wage, hell I had to go through, prep school, I had to go through, Yale, I had to go through, MBA program and a PhD before I finally was able to earn something above the minimum wage.

These kids need on the job training and they're never going to get that on the job training unless they first get a first job in learning. I did a whole program in San Diego, you'd remember this Ted, with Rosey Grier, he did the on hands, clean your fingers, wash your hands, don't say those words anymore, pull up your pants, get the chain. And I did the macro stuff, and Rosie, I did the macro and he did the micro stuff. We have a really important thing for the role in governance to breed all the things you talk about. And I couldn't agree with you more, and that's how to make it work and get our government to redo a good job.

Question (cont'd):
Do you mind if I just had a quick follow up? We're moving from this last 100 years of America industrializing becoming the world's most powerful country. Now, we're going through the next century of US digitizing, which we're seeing over the last 20 years has had an incredible impact on our economy to grow, the change in theSS&P 500, the Dow 20, wherever it may be, is it in a sense a mechanism for retraining our industrial workforce of the last 20 years to a digital workforce? How do you think about tax policy or policy in general for that?

Dr. Art Laffer:

The first place is you need to be able to have a job in a new field to make it worthwhile to learn it. And that's really important. So the primus primum, the first of all first, is economic growth. Once you get the growth, then what you want to do is make sure that it's not anti-output the policies you have in place of which I have always gone for a low rate, broad-based flat taxes. I did Jerry Brown's flat tax., we got rid of all federal taxes, all of them. And in there Ted, we had two flat tax. We got rid of the income tax, the payroll tax for the employer and employee, corporate tax, capital gains tax, death tax. We got rid of all excise tax, we got rid of all tariffs, we got rid of all except for sin taxes.

And the reason Jerry and I kept sin taxes is because their function is not so much to raise revenues as it is to change behavior. I used to say, we Americans, we don't like fellow Americans drunk shooting each other and smoking all at the same time. But then we got rid of all federal taxes and put in two flat rate tax, one on business net sales, if you're a Democrat, forgive me if you're a Republican, I say, net sales, if you're Democrat, value-added tax. And then we had another one, a personal on adjusted gross income. For Jerry, I did it, we calculated total federal taxes, divided it by the space. We're going to have this common rate from the first dollar to the last dollar, no deductions, exemptions or exclusions.

And what we did, we found out it came 11.8% or 12% was the flat-tax rate. That's about government spent taxes are about 20% of GDP, and that comes out at 12%. He wanted a little bit extra revenues so we ran on a 13% flat tax. If you'll interview, remember Jerry, this is 1992 against that blue eyes, son of a B. from Arkansas, Mr. Bill Clinton, and we went after him wholeheartedly on economics. We had just won. We started off in the race at eighth in the polls in the race, Jerry said, "Thank God they're not nine in the running of the road, we'd be ninth. And he was right. And he ran on this thing, we picked up from the polls dramatically. We had just won Connecticut, we'd just won Oregon, we're coming into New York and California. We had that guy in the cross hairs.

We were going to win when Jerry Brown announced three weeks before the New York primary that he was going to have Jesse Jackson as his running mate. Jerry did not want to become president, but that's the way to do it. Get the hell out of the business, get a low rate, broad-based flat tax, don't let government pick winners and losers, unless there's a really big reason for it. It's not because there's some lobbyists and some congressional districts that hold the chain, no, no exceptions, low rate, broad-based flat tax, and just let the system take off by itself, creating prosperity and also creates the incentives for people to switch from industrial to digital.

Government spending if you're going to make redistribution should be where you do it, not in taxes, you should never mix government spending programs with tax programs. It makes no sense whatsoever. I hope that addresses your issue.


It's really serious stuff we're talking about and I hate to get really excited within, especially at my age, but this is not a joke. The economy is not a funny, there are real people who are suffering enormously today because of huge mistakes in government policies. We're never going to be able to correct all the injustices of earth, but what you want to do is what Teddy Roosevelt said, we can't guarantee everyone gets dealt a winning hand.

And we can't guarantee that if you are dealt a good hand that you're going to play it correctly and being a winner, we can't guarantee that. All we want to make sure is that we guarantee there's no tomfoolery in the dealing of the hands. The hands are dealt fairly and correctly and the government doesn't tilt against the rich man or against the poor man, in favor of the poor man against the rich man of a low rate, broad-based flat tax, and let the economy go. They'll create so much prosperity for you that it'll be phenomenal. That's where the dream is of government, it's not to run things, is to create an environment where we can live our lives and play our hands as best we can.

Capital Gains and Definition of Income

Question:
Professor, let's assume that we remain in the purgatory short of Nirvana of flat packs and the future. Assume that and speak for a moment if you will on the wisdom or folly of significantly differentiated capital gains right from income rate.

Dr. Art Laffer:
The way capital gain should be treated, if I may, will be really serious with you here. The increase in unrealized capital gains, or if it's realized should be counted as income, and the reduction in unrealized capital gains should be a deduction from income. Income of a person should be defined as all the money you spent, plus all the money you gave away, plus your increase in wealth. This is the Henry Simon definition of income that I think every economist will agree is what is, what is the control over resources you've had over a fixed period of time? And that's your income? What you spend, what you giveaway and the increase in your wealth.

And all of that should be taxed at one rate, period. That would include increases in unrealized capital gains should be taxed as income and reductions in unrealized capital gains should be deducted from income. And it should be taxed only once, there should be not a separate tax for capital gains upon death. You should pay it when the capital gains occurs and that's the only time when you actually realize it is irrelevant, it's when the unrealized gain occurs that you should be taxed on it and never again.

Question (cont'd):
Who are the legion of accountants who determine what will each time that pictures?

Dr. Art Laffer:
It's pretty easy. There are lots of examples you can give me where it's really not easy, but let me take a guy like Warren Buffet, who I did the paper in The Wall Street Journal, I think it was his 2000 tax returns that he released. Warren Buffet paid 7 million in taxes, his income, when he said it, he said his income tax rate was 19.4% of his taxable income, which gave him a $35 million income. And which then when you realize that he deducted all of his excess charitable gifts, which was 30% of adjusted gross income, he had about $43 million adjusted gross income in that year. You can calculate these numbers exactly and if any of you want this paper, I'll be glad to send it to you.

I then went and looked at what he did. If you look at what he did, he gave away, I think $2 million, little less than $2 million to the bill and Melinda Gates Foundation that year, he gave way a couple of... Excuse me, $2 billion. He gave away a couple of billion dollars to his two sons' foundation, his daughter's foundation and his wife's foundations plus maybe others, but it was about 4 billion he gave away. I then went, looked at Forbes 500, the value of his own holdings at Berkshire Hathaway, and I think his holdings at the Berkshire Hathaway that year went from 36 billion to 46 billion, it was 10 billion.

His income that year correctly designed was about $13 billion and he paid $7 million in taxes. All legal, all perfectly legal, I'm not in any way, shape or form accusing him of anything. It's just our tax code sucks. If we'd have had a low rate, broad based flat tax, his wealth would have increased, he'd have paid probably something about one and a half, $2 billion in taxes and bam, he'd have been better off we'd have been better off and the world would be running a lot better. That's the way you want to go out with capital gains, that's the way you want to do it. You want to tax increases and unrealized capital increases as income decreases and unrealized capital gains as negative income, and then your tax it once at the income tax rate, the flat rate and never again. Whenever you want to sell that asset fine, you don't have to pay taxes on it as long as you've paid it on the increase and unrealized capital gains. You follow me?

You don't want to have the locked-in effect on capital gains because that destroys production. I remember Russell Long telling me, Their offer. There was this man here in the Louisiana down in Baton Rouge. He's got beyond 75 acres downtown. He bought it for $1.50 and 13.75. It's now worth $4 billion, but he can't sell it because he would have to do the capital gains tax." And so it was led really inefficient. That's not what you want. You'll want capital gains to be flexible liquid, just like all other assets. Sorry, I went along with you on that.

View on Low Interest Rates Going Forward

Question:
Art, I always enjoy very much your comments, I wish you could get all the schools to teach economics as simply and straightforward as you're describing. When you look at the balance sheet, the risk of looking at the balance sheet as a country, as these are not income producing assets like they are corporations, and the only way to realize any of that value is to sell them. Who's going to buy the huge amount we're talking about. So they're really not very liquid, but my main question follows up on what Andrew Tisch said. So the debt and everything you said assumes interest rates are going to remain low for an extended period of time, but they're extraordinarily low.

Typically, through history, they've been more like 4%, we sold in spite of well into the teens and the early ‘80s. So even if I go back to five to 10%, right now, at 1% on 30 trillion, you look at the 300 billion a year, but if they go to 10%, that's 3 trillion that you're going to have to pay an interest, when she pulls all the money that government's collecting now, you've got a serious problem. So you're counting on very low interest rates, historically extraordinarily low rates, continuing forever, which I don't think is realistic.

Dr. Art Laffer:
Let me if I can, any of you want my paper on the debt, national deficits and debt, I'd be glad to send. Ted, if you get their names, I'll be glad to send them the paper before COVID hit. But let me just say interest rates reflect two things, they reflect the service of the debt they do, but they also reflect a payback of the debt. If you have 2% inflation and you have a trillion dollars in debt, that's $20 billion of debt being reduced every year in real terms because of the inflation. So most of the interest rates that you're talking about, especially if you're talking about it when we came into office, when God still loved American and Ronnie won the election, we took over in January 20th, 1981. I mean, the private interest rate in this wonderful country of yours was 21.5 %.

That was not an interest rate that you would consider the proper interest rate on the national debt. That was a huge inflation premium that was reducing the real value of the national debt dramatically. So all I beg you is what you want to really look at is the interest rate that would exist if there were no general inflation, that's the one you want to look at, and we're calculating these numbers. If you're going to replace the debt that you were reduced because of inflation, I don't see anything that would be uneconomic about that.

Let me if I can though, when you talk about earning income on an asset, there's a little place in Southern California, I don't know if you've heard of it, it's called Camp Pendleton. Think about Camp Pendleton for a minute. You get the San Onofre, the big nuclear reactors, that are in the San Onofre. If you go down to then, I forget what the Northern most city is there, just before you get into regular San Diego area.

Question (cont'd):
Oceanside.

Dr. Art Laffer:
Oceanside. Thank you. Camp Pendleton from San Onofre. It's 20 miles long. You've got about 15 miles from the five to the 15, but you've got some things in there. You've got about 300 square miles of Southern California beach front property. If you were to give it to a developers to develop and sell over the next 10 years, that could fetch you a pretty penny. If you looked at, let's say, Fort Knox, a Fort Knox in 1933, Roosevelt put in the Bank Holiday Act and took all the private gold and some of the monitor, silver and all the gold certificates went over and buried it all in Fort Knox. If any of you by the way have been to Fort Knox have seen all that gold? No one has.

Imagine if we just took that now which was at that time $20.67 an ounce, what's the price of an ounce a goal today? 1,800 bucks, 1700 bucks an ounce if you did that, we could do a huge amount. I could if you gave me a sharp pencil and a pad of paper, I could sell off. I could reduce the national debt in a long weekend if I had a big magnifying glass, I could reduce the national debt in a weekend by these types of measures by probably 7 trillion, just bang.

Question (cont'd):
All that goal today's prices is only 500 billion, only half a trillion by the way.

Dr. Art Laffer:
I don't know what the numbers are, I got a little bit larger than that, but when it was done in $20.67 an ounce, as it was back then, it was a little bit over a 10% wealth tax on US GDP in 1933 is what it came out to. I don't remember how many ounces of gold and stuff, but it's a lot of money and there are a lot of others there too, but I don't want to argue about the dollar or cents, Camp Pendleton is really expensive. Will you agree with me in that?

Let's imagine we did one and had a fun one, which I've suggested for years and years, we do it Federal State and local bank tax holiday, tax amnesty, excuse me. The IRS estimates is something like 10% of all incomes are not reported, the taxes go uncollected. If you take that number on 2 trillion, you've got about 2 trillion a year, you've had it for the last 20 years. If you did a bank tax amnesty program, you could probably collect, I don't know, trillion and a half, 2 trillion and ongoing collections going for... There are lots, lots of ways of doing efficiently, well done tax programs that can collect a lot of revenues, reduce the debt dramatically, and also would not destroy economic growth.

And these things just should be done across the board. I've been recommending these for years and getting a good blank slate. I took enterprise zone to all my democratic friends and they didn't go for it, they didn't care. I had to find two famous white guys to do the enterprise zone. I found one guy who wished he was black, Jack Kemp, and I got the other guy who'd never met a black who was Ronald Reagan, they were the only ones that would allow me to do my enterprises. We got something done with it.

We have all of these revolutionary policies that can be put in there that would really change the face of this country and not cause a depression. Honestly people, and the best one of all, and forgive me for this, is everyone responds to incentives, everyone. I took a pillowcase at $20 bills up to Harvard University, the Sociology Department in Cambridge, Massachusetts on a day right after Bernie Sanders gave a rally, it was the capital of Fabian socialism. I stood on a chair, there was a slight wind blowing, and I took that pillowcase of $20 bills and slapped it up in the air and all these $20 bills went floating over the crowd, and within 15 seconds, they were all gone.

Socialists, love money. The quick is the problem we have today is that government spends other people's money. They don't have any incentive, they don't have any skin in the game. Would you invest in the company where the management and the board of directors had no stock options and own no stocks? Of course you wouldn't. The reason we have a problem with government is they have no incentives to do a good job. My view is really simple. What I'd do is if you have 3% economic growth, Congress and the president get their pay. If you have 4% growth, you'll double their pay.

If you get 5% growth, you triple their pay. Straight, they get 2% growth, they don't get any pay. 1% growth, they owe us their pay. At 0% growth, they owe us double their pay. if you put an incentive structure in like we do in every business, you're in again, great behavior. What the problem is, we need to put government on commission. I have no problem with the government officials making lots and lots of money as long as I do too, it's when they make a lot of money and I don't, that that's the problem. And the trouble is we're incentivizing government to make money in all the wrong ways.

I have never heard of a politician dying poor, and that is the case here. We need to re-incentivize the government of this country to run as if that their livelihood dependent on it, which it should. And that's as you've seen the essence of supply side economics is merit pay for politicians, I think is the right answer, and then we wouldn't have to have these discussions. We wouldn't worry about No Labels. These guys make a lot of money it's because they're doing a great job and there's nothing wrong with that.

Sign Off with Bill Galston

Bill Galston:
Good to see you again, Dr. Laffer. The last time was at our debates sponsored by [inaudible 01:00:25] and The Wall Street Journal at New York a few years ago.

Dr. Art Laffer:
I remember well. You were on my side most of that time, by the way.

Bill Galston:
Well, now is not the time to resume the areas where we disagreed, since we just about out of time trying, but I would point out that there is a fatal flaw in your Camp Pendleton plan. And I speak with authority here because I did my specialist training at Camp Pendleton during the Vietnam era, and the Marines would be a raid against you. You wouldn't have a chance, so you can forget about selling off Camp Pendleton, although it is worth a heck of a lot of money, I'll grant you that. Look, your enthusiasm is infectious, we hope at the age of 80, we'll all have as much energy and as much hope for the future as you do.

And we agree with you that the central part of hope for the future is a government that functions and does the right things. We are working here at No Labels to come up with a formula where the two political parties will not only agree more frequently than they do, but also agree on the right things more frequently than they do. And we hope you'll be willing to come back from time to time. And unfortunately, we have no incentives to offer you to the best of my knowledge, so we'll have to rely on your generosity in order to come back. I don't know whether that implies any sort of tweaks to your theory of human motivation, but let's not go there.

Ted, thanks for recommending Dr. Laffer as a guest, it's been a pleasure. And we are adjourned.

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