Governments can boost revenue by slashing taxes. This idea has played an extraordinarily influential role in American economic thought and policy, particularly among conservatives, since the Reagan administration.
Arthur Laffer does not claim authorship of the idea, but he did help introduce it into the political mainstream. Legend has it that Mr. Laffer held an impromptu lesson on supply-side economics for Dick Cheney and Donald Rumsfeld at a restaurant in the 1970s, where he drew a curve on a napkin illustrating the relationship between tax rates and tax revenue.
Mr. Cheney and Mr. Rumsfeld, of course, would go on to serve in the Reagan and Bush administrations, where the macroeconomic theory arguing that economic growth can be most effectively created by investing in capital and lowering goods and services costs, played a vital role.
Some four decades later, US President Donald Trump has presented a tax plan that is almost as brief as Mr. Laffer's napkin sketch. The White House has released a single-page outline of a plan that would, among other things, reduce the US corporate tax rate from 35 percent to 15 percent.
“This is the best tax plan I could ever imagine,” Mr. Laffer, who served on President Ronald Reagan’s Economic Policy Advisory Board, told Handelsblatt in an interview.
OECD countries have made a concerted effort to reduce corporate taxes below US levels Arthur Laffer
Not everyone is as enthusiastic as Mr. Laffer. Indeed, the White House tax plan has come under fire from both sides of the political aisle. Democrats slam it as a giveaway to the rich, and some Republicans are concerned it will massively increase the deficit. The Committee for a Responsible Federal Budget estimates President Trump’s tax plan would cost $7 trillion.
Mr. Laffer does not have much patience for the critics. He believes they are motivated more by politics than economic analysis. “They are either unintellectual, unacademic or political propagandists," Mr. Laffer said.
He believes Mr. Trump’s tax plan could help reverse corporate inversion, in which US companies move abroad to take advantage of lower tax rates in other countries. The OECD's mostly high-income countries including Germany, have “made a concerted effort to reduce corporate taxes below US levels” for years, Mr. Laffer said.
“If we lower the US corporate tax rate from 35 percent to 15 percent, we will be way below the OECD average and all of those inversions will stop and many of the companies that inverted before will come back, and some of those foreign companies will actually invert to the US,” Mr. Laffer said.
He pointed to the so-called Trump trade, which has pushed Wall Street to record heights, as a sign of the impact that even the promise of such large tax cuts can have on business confidence in the United States. However, it will take time for the full effect of the president's tax plan to be felt, he said.
As for concerns about US debt, which stands at 100 percent of GDP, Mr. Laffer said there's one way to solve the problem - through growth. "You cannot solve your debt problem without income growth, you cannot solve the economy by un-employing everybody," he said.
Moritz Koch has been Handelsblatt's Washington correspondent since 2013. To contact the author: [email protected]