Up, Up and Away: The Art Laffer Interview

A transcript of the weekend’s program on FOX News Channel.

Gigot: Welcome to “The Journal Editorial Report.” I’m Paul Gigot.

Well, as April 15 nears, taxpayers across the country are struggling to meet the filing deadline and wondering how much higher their taxes can possibly go. Economist Arthur Laffer is here to tell us. He’s the co-author of the book “The End of Prosperity: How Higher Taxes Will Doom the Economy if We Let It Happen.”

Arthur, thanks for being here. Great to have you here again.

Laffer: It’s a great pleasure to be with you, Paul.

Gigot: You were one of the architects of the Reagan tax cuts of nearly 30 years ago now. But that era seems to be ending at least in terms of taxation. Are we entering a new era of much higher taxes?

Laffer: I think we really are. I mean, with the spending that this administration has done and the promises of not letting the Bush tax cuts continue, I think we’re entering a period of much higher spending–taxes.

Gigot: Well, how are they going to go? It’s now 35% top marginal income tax rate. Under Clinton it was up to 39.6%, and that’s how high President Obama says he’s willing to let it go. But in the past, as you know, they were as high as 70% before Reagan came into office, and even 90% under Roosevelt. How high are they going to go?

Laffer: That’s right. I don’t know how high they’re going to go. But I’ll bet you they’re going to go a lot, lot higher than 40%. I think they’re going to extend the payroll tax. I mean, when you look at the income tax, Paul, I mean, you really can’t collect much money from upper-income people. They know how to get around taxes. So if you want to raise revenues, you’ve got to do it in low-level, broad-based taxes. That includes the income tax, that includes the payroll tax, that includes sales taxes. So would I guess they’re going to really go after these the low-level, high-revenue-base taxes in the next four or five years.

Gigot: Well, wait a minute. Wait a minute. President Obama says nobody under $250,000 is going to pay a dime of new taxes. What you’re saying, if I hear you correctly, is that that’s where the money is. You’ve got to go at it. What’s that going to do to his political popularity if he really does that?

Laffer: Well, I have no idea. The political popularity does not seem to be based on economics, at least not oonf the economics I know about.

Gigot: It’s early days. It’s still early days.

Laffer: It is early days, but he is very popular, but he has proposed the cap-and-trade, which is estimated to raise $650 billion. Now, that’s a pretty big tax.

Gigot: That’s a tax on carbon energy.

Laffer: Yes, carbon energy, but it’ll be paid by everyone, low-income people. It’s a tax like any other tax. My guess is that within the next three or four years, you’re going to see some very major high-revenue taxes, and it cannot be done at the high end because those people can get away from it.

Gigot: One thing we’re seeing is President Obama during the campaign said he would raise taxes, but he has put the income tax increases off at least until 2011, explaining that he doesn’t wan to hit a weak economy right now with a tax increase. But this is now sort of hanging over the economy. People know, investors know, Americans know that this is going to hit in 2011. What does that–what does that do in terms–what impact does that have on investors, decisions to save and so on?

Laffer: Well, investors’ decision to save and so on, it’s negative. For workers, it’s just the opposite, Paul. I mean, if you know they’re going to raise taxes next year, what do you do this year? Accelerate all the–

Gigot: Spend this year?

Laffer: Yeah, you accelerate all the income you can into the lower-taxed years. And I think a lot of people are going to try to move the income as best they can up forward. I think it will be hard for 401(k)s and other deferred-income plans.

Gigot: What are you seeing–I use to live in California, very high taxes.

Laffer: Yes, I did. I moved to Tennessee.

Gigot: California–

Laffer: No income tax in Tennessee.

Gigot: Good for you. I can’t say the same for New York, which is already going to raise taxes, substantially it said.

Laffer: Isn’t it amazing. It’s amazing.

Gigot: California has already done the same. Ten other states are talking about raising taxes significantly, in some form or another.

Laffer: Yes, they are.

Gigot: I thought the stimulus bill was supposed to prevent this by sending money back to the states. What effect economically is this going to have?

Laffer: Well, I think that raising taxes in state and local governments is going to be very detrimental. I mean, you can get a lot of people who move, like I did. I moved from California to Tennessee specifically because of taxes. Now I love it here. It’s really wonderful. But I think it’ll really reallocate people, not reallocate revenues, on the state and local taxes.

But the stimulus package, I don’t think it’s going to help the economy, Paul. You can’t bail someone out of trouble without putting someone else into trouble, and if you spend that money bailing losers out, like the auto companies and some of the other companies, those moneys come from winners, and it just hurts the economy long-run. That really the essence of what our book is all about, is how in the long run these taxes will have to rise, and it will do a lot of damage to the economy.

Gigot: But here’s what the Democrats would say, and here’s what White House economists say to me, which is, You know, you guys said the same thing in 1993, when Bill Clinton raised taxes, and look at how great the ’90s were. Taxes just aren’t that significant an impact on the economy. What’s your response to that?

Laffer: My response, No. 1, I did not say that. I mean, I voted for Bill Clinton. I thought he was a great president. I did not like his raising taxes, but the rest of his policies I think offset it amazingly. He did push Nafta through Congress, against his own party and the unions. He got rid of the retirement tests. He signed into law welfare reform. He reappointed Reagan’s Fed chairman twice. He put in–signed into law the biggest capital gains tax cut in our nation’s history. And he–he cut government spending as a share of GDP, Paul, by 3½ percentage points. So that’s better than the next four presidents combined.

Gigot: So tose policies dwarfed the tax increase of 1993?

Laffer: They did. They did. The tax increase of 1993 did hurt the economy, but on balance it was way more than offset by the other great policies that Clinton did, I thought.

Gigot: All right, now here we are. You remember the ’70s. We had a terrible economic time. Reagan came in, proposed a new economic plan, and the economy did very well. We’re sitting here facing an era of higher taxes. If you’re a low-tax person who believes in free markets, what should be the response? How–do you just propose lower taxes across the board, or do you propose a specific tax cut, like on the corporate tax rate, or maybe go the route of tax reform?

Laffer: I think we go the route of tax reform. I mean, there was a great article in The Wall Street Journal today, by the way, that went on tax reform, and it was really terrific. I think we go tax reform. We get a low-rate flat tax. I like the one that Jerry Brown did in 1992 when he ran against Clinton in the primary. You get rid of all federal taxes except for sin taxes and put two low-rate flat taxes, one on businesses–net sales or value added–and one on personal unadjusted gross income. No deductions, no exemptions. Just bang, that’s it. And you could match all federal revenues today with a tax rate of about 11.5%. That’s pretty amazing. We could really have this economy booming.

Gigot: All right. On that hopeful note, thank you very much for being here.

All right, still ahead, runaway prosecutors. The abuse of power in the Ted Stevens case isn’t an isolated incident. We’ll take a look at how widespread the misconduct is when we come back.

Art Laffer’s email is jax@laffer.com.

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