The Father of Supply Side Economics with Arthur Laffer

Bill WaltonEconomics, Investing, Policy, Politics

Most people talk to Arthur Laffer about supply-side economics and his famous “Laffer Curve,” which shows how governments can increase revenues by lowering taxes.

But few will do what I did when Laffer was a guest on “Common Ground” and ask him for investment advice. And that advice might surprise some.
Laffer likes France “because we think Macron is much better than Hollande,” he said, referring to France’s new president, Emmanuel Macron and its former president, socialist Francois Hollande.

That’s because, to Laffer, it’s not about politics. It’s not about immigration policy or cultural shifts or social issues. It’s about what he calls the four pillars of prosperity – monetary policy, trade policy, tax policy and fiscal policy.

Get those right, and societies will prosper and give their citizens a shot at a better future. Get them wrong, and progress is nearly impossible.
Who does he think gets this right? Again, some of the answers will surprise.

China gets it right, Laffer said. It has opened trade, cut taxes, reduced government presence in the economy and shored up its currency and, in the process, done more to reduce poverty over the last 40 years than all the countries in history combined to that point.
Tennessee gets it so right Laffer moved there from California just to take advantage of the smart policy and was able to pay for his home with the tax savings from his first year there.

Tennessee has no state income tax and relies almost solely on a flat and comprehensive state sales tax. It has the lowest tax rate in the nation, the fastest growth, the best improvement in public services, fully funded pension funds and a $2 billion surplus.

Presidents Warren Harding, Calvin Coolidge, Ronald Reagan and Bill Clinton all got it right, Laffer said.

Clinton was “an amazingly good president in economics,” Laffer said. He cut taxes, reformed Social Security, cut the capital gains tax to 15 percent, eliminated the capital gains tax on owner-occupied homes and imposed a work requirement on welfare.

Who gets it wrong?

The four stooges, as Laffer called them – LBJ, Nixon, Ford and Carter – as well as the two presidents before Donald Trump. They didn’t understand the value of creating economic growth or the role tax incentives played in economic decision-making, he said, and the country grew slower than it could have in every instance.

Same goes for high-tax states, which perform worse than low-tax states in every instance, he said.

Laffer said he hopes President Trump follows through on his economic proposals, especially reducing the capital gains tax to 15 percent, which he said would put a jolt into the heart of the economy.

That would make it lower than every industrialized country except Ireland. Which is always a good investment opportunity, he said, because the capital there is always Dublin.

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