Highly esteemed American economist, Arthur B. Laffer, shares his insights about the recent Trump tax bill and its current and potential positive impact on the US economy. He also provides suggestions to advance the Japanese economy and explains why the ill-conceived Abe approach to growth is doomed to failure, bringing with it negative personal and corporate implications for the future of Japan in its wake. His insight and clarity lends itself to this most important interview, and we are honored to share it with readers of The Liberty.

 

Interviewer: Hanako Cho

 

Influence of the Tax Reduction Bill

Interviewer: What will the influences of the tax reduction bill passed last December be?

Dr. Laffer: Number one, I think that cutting the tax rate from 35 to 21 percent is amazing. At 35%, the US had the highest corporate tax rate in the OECD. By dropping it by 21%, the US is right in the middle of the pack and is now very competitive. As you know, Japan has cut its corporate tax rate over the last several years by a great deal in order to increase Japan’s competitiveness. In fact, in the year 2000, the US had the same tax rate it did last year, but it was 7th-highest in the world, not number one. So that’s the first thing. It makes the US businesses competitive.

 

Taxing on a Territorial Basis

Number two, the Trump administration has also made it so that American companies are taxed on a territorial basis, not a global basis. The United States was the only country to tax US companies on a global basis. Every other country taxes its companies on a territorial basis. That is a wonderful improvement in the competitiveness of the United States. It makes us exactly the same as every other country.

 

Expensing Capital Purchases

Number three, the US has 100% expensing of capital purchases for the next 5 years. What that does is increase the internal rate of return on investments and makes the US very prone to economic growth.

 

Cutting the Personal Tax Rate

Number four, the US cut the highest personal income tax rate from 39.6% to 37%, which is a very good thing to do as well.

 

Lowering the Pass-Through Tax Rate and Economic Growth

And the last thing I’m going to mention is that the US lowered the pass-through tax rate on non-corporations, from 39.6% to 29.6%, which is a major tax rate reduction for pass-through companies. I believe that it will increase the US growth rate by at least three or four percent for a couple of years. And that that will lead to more economic growth and prosperity for the next decade.

 

Tax Revenues Will Increase

My estimates are that tax revenues will go up by about $1.5 trillion. Not down, but up. The other people are saying they will go down by $1.5 trillion. They’re wrong. The US tax revenues will go up by $1.5 trillion.

 

Positive Effects of the Tax Bill

Dr. Laffer: Also other factors like tax sheltering will yield positive effects. Tax sheltering refers to all of the things that people do to reduce their tax burden, such as write-offs and expensing. That will go down dramatically. Choice of business organizational forms will be become far more tax-efficient and will reduce the offset dramatically. Tax evasion and cheating on taxes will diminish dramatically as well. Companies will come back to the US that had left the US, and companies that were thinking about leaving the US will not leave. In fact, they are returning.

 

State and Local Tax Revenues Will Go Up

And let me just say that the last thing I want to mention is there are lots of other taxes besides corporate taxes. All of those tax revenues will go up dramatically as well. Revenues of state and local tax, which you call prefecture taxes, will all rise dramatically as a result.

 

The Pass-Through Tax Reduction’s Effect on S Corporations

Interviewer: May I go back to the issue of the pass-through tax reduction. Could you please tell me more about the significance of the tax reduction to pass-through corporations?

Dr. Laffer: Sure. Companies that are not corporations are called S corporations, partnerships, and limited liability corporations. There are a large number of these small businesses that are not corporations and they…

Interviewer: I heard that 94% of the US corporations are pass through corporations.

Dr. Laffer: Yes, and let me explain to you the tax here. Before, the government would tax their income at the personal tax rate, which is 39.6%. What they will do now is the monies that come through will have a deduction of 20% on the income. So, therefore, you will pay taxes only on 80% of the income and the new personal income tax rate is now, instead of 39.6%, it’s 37%. If you multiply 37 x .8, you should get something like 29.6%.

Interviewer: So they can reinvest their income to the new business?

Dr. Laffer: They can reinvest it. They can go and have parties. They can drink some sake and have some wonderful sushi [laughter]. They can do anything they want with it. It’s their money.

Interviewer: Wow. That’s wonderful. So they can grow their business more.

Dr. Laffer: If they want to, they can grow their business. If they want to, they can invest in other businesses. They can do whatever they want with that money.

Interviewer: That’s wonderful [laughter].

Dr. Laffer: As the US became the highest corporate tax rate country in the OECD, the number of C corporations declined dramatically. And these pass-through corporations grew very sharply. That’s what happened and is one of the reasons for dropping the corporate tax rate, and also the personal income tax rate and the pass-through deduction.

 

An Increase in C Corporations

Interviewer: I see. So do you think the number of C corporations will increase?

Dr. Laffer: Yes. Very much. The number of C corporations will increase, I believe, quite dramatically over the next several years.

Interviewer: Why?

Dr. Laffer: Now, this is exactly what happened in 1986. We cut our tax rate from 46% to 34% and C corporations, which had been declining, rose way back up again. And I expect that to happen again.

Interviewer: Because of the decrease in the corporate tax, right?

Dr. Laffer: Tax rate, yes. I think that’s very true.

 

Government Debt and Tax Reduction

Interviewer: With regard to the government debt and tax policy, Japanese government debt has reached more than two times the GDP level. Therefore, the Japanese government is very hesitant to reduce the corporate and income tax rate, although President Trump approved this last December. Would you please share with us your thoughts on the relationship between government debt and tax reduction?

Dr. Laffer: Let me just say that by reducing the tax rate, two things will happen. Economic growth will increase and tax revenues will increase as a result of this tax rate cut. So, therefore, with faster economic growth and less deficits, the national debt will decline very sharply, I believe, as a share of GDP.
Now, I am no expert on Japan, but I think the Japanese tax way too high and they should cut taxes to create economic growth. I think the effects of a tax rate cut would be very good for Japan.

 

The Impact of the US Defense Budget on the Economy

Interviewer: I agree with you. Can I ask you about the swell of the defense budget that may trigger a collapse of the US economy? People like Paul Kennedy, author of The Rise and Fall of The Great Powers, said that the world hegemon’s government debt will increase due to the increase of the defense budget.

Dr. Laffer: Let me say this. I’m not an expert on defense. I am not. I mean, obviously, the defense budget is needed for reasons other than budgets or deficits. But I do not believe that the defense spending will help the economy. I don’t think so. But I think defense spending is very needed as one of the essential parts of what the government should do. Does that answer your question?

 

The Essential Nature of a Strong Defense Budget

Interviewer: I think so. So, you think it’s not helpful for economic growth, but it’s essential?

Dr. Laffer: Yes. Exactly. When I see North Korea and other things, and again remember, I am not an expert on military, I like to see a strong defense for the Western world.

Interviewer: Because we are surrounded by nuclear-armed nations, so we are very much concerned about this situation.

Dr. Laffer: I understand you are. And I share your concern very much.

 

Abe’s Conditional Corporate Tax Cut

Interviewer: With regard to the corporate tax, Prime Minister Abe is proposing that the government reduce the corporate tax on the condition that corporations agree to increase the wages of their workers.

Dr. Laffer: Let me go back to a point I made earlier to address this idea. You asked me about pass-through corporations, and stated in regards to the money saved from a tax cut, that companies can use that money to reinvest in their business. And if you remember, I replied to your observation by saying, “It’s their money. They can do with it as they want. They can buy sake or sushi or go to parties or invest in other businesses.” The government should never tell people what to do with their tax savings. It’s their money.

 

“Japan Is Becoming A More Socialistic Country than Before”

Interviewer: Prime Minister Abe also asked these companies to raise the minimum wage.

Dr. Laffer: I believe in the United States that raising the minimum wage would be the wrong thing to do too. It’s their money. Let them do with it as they see fit. Politicians do not make good businessmen.

Interviewer: But they are getting orders, so has Japan become a socialistic nation already?

Dr. Laffer: You can see what has happened to Japan as they have become more and more socialistic. It’s been a catastrophe.

 

Abe Policies Make Corporations Wary

Interviewer: Now corporations are hesitant to hire full-time employees because companies will have to bear the burden of half of the social premium cost. So, although the government is asking them to hire full-time employees, companies are very reluctant to do so.

Dr. Laffer: I understand. My view of the world, and I’m not Japanese and I don’t wish to lecture to the Japanese on how they should run Japan, but if it were my country and my government said what Abe has said, I would say that is just nonsense. Government should stay out of private businesses’ affairs and it’s not his concern. That is a decision for the Japanese to make, not mine. But if it were an American president who said that, I would vote against him and try to throw him out of office [laughter].

 

Social Welfare Taxation and Wealth Redistribution

Interviewer: The Japanese government does not explain the truth of the social premium cost. It’s going to keep going up because our society is aging, but the government is not explaining this clearly to the Japanese people. How do you see this current Japanese situation?

Dr. Laffer: Well, we have much the same aging issue here in the United States, although we’re not as extreme as Japan. You have a much older population and many fewer young people in Japan than we do here in the United States. What needs to happen is the social programs should be funded, fully funded, on a defined contribution plan, which means every worker should be required to pay into his or her fund the full amount that they will ever get out in the future. No one’s benefits should be based on taxes paid by other people.

Interviewer: I see. Now, other people’s premiums are supported by the younger people.

Dr. Laffer: I know. That is very, very, wrong and it causes a misalignment of incentives, reduced economic growth, and it also, ultimately, causes poverty for everyone. But let me say it this way for you. If you tax people who work and you give the money to those who don’t work…

Interviewer: There will be less people who want to work.

Dr. Laffer: You will get very few people working. You see it very clearly. It’s called economics. And it works in Japan and the United States and in Russia and in Africa. It works everywhere.

Interviewer: Everywhere.

Dr. Laffer: It’s human. If you tax rich people and give the money to poor people, you will get lots of poor people and no rich people.

 

Japan’s Current Pro-Tax Government Stance

Interviewer: But we only have a pro-tax government, and pro-tax parties that really want to implement this redistribution on its people.

Dr. Laffer: Well, then move to the United States, please [laughter]. We would love to have you here.

Interviewer: That’s a kind invitation!

Dr. Laffer: It’s my open invitation to you. It is tragic when they take from people who work and give to people who don’t work.

 

Defense Spending As a Necessity, Not an Economic Incentive

Dr. Laffer: Now, the other thing that Japan does that I want to relate in terms of my earlier point on defense spending, is that a poor person cannot spend himself into wealth. Government spending is taxation. No matter whether they finance it by deficits or taxes, government spending hurts the economy.

Interviewer: Whether it’s for defense?

Dr. Laffer: Well, defense has other reasons, but defense does not make your country rich. Defense may be necessary to have, but don’t think it helps the economy. It does not help the economy. Putting locks on your doors does not make your wages go up, but it may well be necessary to safeguard your home

 

Introducing A Flat Tax, Fiscal Responsibility and Reducing Regulations to Expand the Japanese Economy

Interviewer: President Trump won the election in 2016 because many American people have awakened to the populist movement. What do we need to do in order to bring the same revolution to Japan?

Dr. Laffer: What Japan needs, I believe, is a very major restructuring of economic incentives and spending that is pro-growth. I worry very much about Japan personally because I’m worried about the long run survivability of Japan. You don’t have any more babies. If you have no young people and your country is declining very rapidly…

Interviewer: And by 2050, we have to pay 70% tax rate if we continue current social welfare system…

Dr. Laffer: I know. It’s ridiculous. What Japan needs to do is to introduce a low-rate, broad based flat tax. That’s number one.
Number two, Japan needs to cut government spending a lot, especially on social programs and entitlements. Number three, sound money. Sound money is very important. Number four, free trade. Japan does not have free trade. You have all sorts of non-tariff barriers to trade and that do not help Japan and it doesn’t help anyone.
And number five, the final one, is minimal regulations. Everyone knows you need regulations, but they should not go beyond the specific purpose at hand and cause collateral damage. Let me list it again: Low-rate, broad based flat tax; spending cuts; sound money; free trade, and minimal regulations. And then get the government the heck out of your economy [laughter] and let the Japanese people solve the economic problems, not some politician.
Let people spend their own money as they want to spend it. The government shouldn’t tell them to raise wages. The government shouldn’t tell them what to do with their money at all. People know far better what’s good for them than the government does.

Interviewer: I know.

Dr. Laffer: And the last thing — not part of this program — all government employees should be paid on commission. If the growth rate of the economy increases, pay them more. If the growth rate of the economy decreases, take their pay away. And if it grows too slowly, fine them. Make them behave like the rest of us.

Interviewer: Right, right.

Dr. Laffer: If you do a bad job, your newspaper fires you, right?

Interviewer: Yeah, because it’s a private company.

Dr. Laffer: Well, and also, the same thing should be true for government employees. They should be paid on how good a job they do.

 

What Is Best for Japan Is A Flat Tax

Interviewer: You are proposing a flat tax. But the Japanese Parliament is introducing a progressive tax system.

Dr. Laffer: Get rid of progressive taxes. Poor people should pay the same percentage as rich people. No deductions, no exemptions, no exclusions. Whatever you earn, you pay a flat tax on it.

Interviewer: We think it’s really important to introduce flat tax system in Japan. Could you please help me understand the significance of the flat tax system?

Dr. Laffer: It does several things. One is it lowers the disincentives to work. As you said, your highest tax is 70% by 2050?

Interviewer: Yes.

Dr. Laffer: Okay, what you want to do is have a low-rate, broad based flat tax so everyone has the exact same incentive to work and there’s no advantage to switching income from one source to another. And there’s no place you can put your income to avoid taxes. Then you want spending restraint. In Japan, you need to cut government spending a lot, especially on entitlement programs.

 

Trumponomics

Interviewer: You are going to publish a new book entitled Trumponomics in October of 2018. As we want to share that book with our readers in advance, would you please share the important points that you are addressing?

Dr. Laffer: Three of us, Larry Kudlow, Stephen Moore, and I, are all writing the book together on the economic policies, and our personal stories with President Trump and the Trump Administration. And we will be going through things like the tax bill, Obamacare, healthcare, and deregulations. We’re going to go through all the types of things with personal stories in that book. I think Trump has done a very good job so far.

Interviewer: In this one year?

Dr. Laffer: Yes, he’s done a very good job in terms of economics.

 

Ensuring Long Term Prosperity for the US

Interviewer: You worked as an advisor to President Reagan, who achieved a 25-year economic growth, and now President Trump is trying to achieve the same economic growth as Reagan had. But we’re concerned that effect may fade away if the tax reform bill expires when he leaves office in 2024. What would you propose to ensure long-term prosperity?

Dr. Laffer: What I think should and will happen is that the policies he’s put in place will create a very strong economy. And I believe it will be very strong. If that happens, his political fortunes will be much, much better in the future. And with more political support, he will make permanent all of these provisions that you mentioned that are due to expire.

Interviewer: Permanent? How can he make them permanent?

Dr. Laffer: Just pass another bill. He just passes a bill saying the temporary bills will never expire. It requires political change in the policies of the United States, but I think with economic growth, he will become far more popular, and we will have more Republican and less Democrats, and the Democrats will be much nicer and will make all of these policies permanent.

Interviewer: It sounds wonderful.

Dr. Laffer: I hope so.

Interviewer: We hope so, too.

Dr. Laffer: I know you do. And I hope your government becomes less socialist and more capitalist and lowers taxes, cuts spending, and stops telling people what to do.

 

“Let’s Chat About Economics” – A Primer for Young Readers

Interviewer: I also noticed a book you published for elementary school students. That’s really interesting. What were your reasons for writing for these young people?

Dr. Laffer: So they can start economics correctly. Let’s Chat About Economics is the book you’re talking about. I did that with Michelle Balconi. It’s for young people to start understanding what economics means in their own personal lives. And we’re doing several other books as well. I think you will like it. It’s a very nice, little, comfortable book for very young people to understand economics.

Interviewer: They can understand economic influences?

Dr. Laffer: Well, so they can understand that when they go to the grocery store what happens there; whether they choose to go to the mountains for a vacation or to Florida or all of these things that are economics that they don’t realize are economics. It helps them understand how important economics is in their life, and thus allows them to make better decisions.

Interviewer: So they are going to be capitalists rather than socialists?

Dr. Laffer: Well, it’s not meant to do that. It’s meant to increase their understanding of economics. And if they understand economics, I find it very difficult to explain how anyone who understands economics could possibly be a socialist. If you tax people who work and pay people who don’t work, you’re not going to get people working. It’s not tough to understand. A country cannot tax itself into prosperity. You understand that.

 

The Immorality of the Redistribution System

Interviewer: Yes, my mother was always frustrated about the redistribution system in Japan because my parents were very hardworking people. They owned a small company, and now they’re retired and enjoying their retirement, but they worked very hard. However, there are so many people who didn’t work, although they had an ability to work, so they are frustrated about the government system.

Dr. Laffer: You’re totally right and that’s very true. And that’s neither good morals, nor is it good economics.

Interviewer: So it diminishes the incentive of working people, right, if governments redistribute.

Dr. Laffer: Yes, that’s true.

Interviewer: Thank you very much for giving us this great opportunity today. It was great interview.

Dr. Laffer: Very nice talking with you. Thank you.

Interviewer: Thank you.