The Japanese local communities are on the verge of collapse due to the decrease in the population. How should Japan respond to the next stage of our country? We interviewed highly esteemed American economist, Dr. Arthur Laffer who has devoted his research to the economy of States, and is an author of An Inquiry into the Nature and Causes of the Wealth of States. His insights and humanity show through all he writes and are so evident in this interview. In reading this, you will see the rationale for lower taxes to incentivize growth and a way to save the Japanese economy. We are very fortunate to have Dr. Laffer sharing his ideas with us. This is an article that should be read and shared.

Interviewer: Hanako Cho

 

Japan’s Municipalities Face Demise

Interviewer: We are going to focus on the local municipalities’ survival in the next issue. Now we have more than 1,700 municipalities in Japan, but about 900 municipalities will disappear over the next two decades because of de-population and finance difficulties. But it’s very clear that the Japanese central government cannot distribute subsidies to local government in the same amount over the next two decades, but they haven’t made that clear to the government officials working for local municipalities. That’s why they are really dependent on the central government.

So I’d like to ask some advice on this from you. For that, I thought it might be very nice if we could start our discussion based on the ideas developed in your book, “An Inquiry Into the Nature and Causes of Wealth of States.”

Dr. Laffer: Let’s just talk about that. I’ll use the American experience by way of background to show you what has happened. I’ll try to make it interesting and not too specific.

Interviewer: Thank you.

 

A Look at California’s Prop 13

Dr. Laffer: What I did in that book, The Wealth of States, is what I’ve been working on in this area since Proposition 13 in California, which was in 1978. I wrote a paper on it. I was a professor at the University of Southern California and there was a proposition on the ballot, a constitutional amendment that would limit property taxes not to exceed 1% of the market value of the property.

Now, there were lots of other parts of that proposition, but by limiting the tax to 1%—at that time, property tax rates were about 2.5% of market value—this was a huge tax cut from 2.5% to 1%. Opponents said it would be the end of the Earth and the world would collapse. So that’s when I started on taxes. And I did a paper on it, which I thought would help California, not hurt California. I thought that it would make California much more attractive. People would move to California. It would excite the economy of California, which was my view.

In the next decade, California grew faster than any state. We increased our state’s population over the decade by a size comparable to the state of Massachusetts. Big. Every year, we grew by a size comparable to the city of San Francisco a year, just to put it into more common terms. Property values had been below the national average before that. All of a sudden, they went way above the national average.

It was just a wonderful period in California history, and that was the period that got me very excited to start looking at state and local taxes and state and local economies as a subject matter, not just a one-off, but to really systematically look at them.

 

The Wealth of the States

I’ve worked in that area for years, and it culminated in my book, “The Wealth of States,” which is a 360 degree view of how the states operate. We have 50 states in the United States. We probably have 80 counties in each state on average. You have maybe three municipalities, maybe four in each prefecture, some more, some less. So it’s a lot of operations going on, and this has been going on for way over a century, and these people collect meticulous data. They have very good files of everything, just incredible detail.

 

Taxes, Taxes Everywhere

Now, in the United States, we have a federal government, which adds federal taxes, monetary policy, regulations, trade policies, defense policies, all of that. That’s all federal. But within the states, each state has to use the US dollar.

Each state is also exposed to federal taxes and federal spending. So the whole country has all that. So there are many things the country does, but states are allowed to have their own tax policies, their own spending policies, and their own regulations as well.

They can’t have their own money, they can’t have their own federal policies, but they can their own state policies without limit. It’s really important to realize that they have complete discretion.

 

Interstate Commerce Clause, Free Mobility of Labor and People, & the Freedom to Tax

Now, two things are required by the Constitution. One is, “No state or local government can impede the free-flow of goods and services across state boundaries, city boundaries, or county boundaries.” It’s called the Interstate Commerce Clause, which means, “Imports have to be treated just like everything else.”

So there is no way you can put barriers up or enact any protectionist measures against another state in the area of trade. The states also are disallowed from impeding any person from moving anywhere that person wants to move as long as that person is willing to live by the rules and regulations of the place where that person moves. So we have free mobility of labor and people, and we have free mobility of goods and services.

This is the most extreme form of international economics ever. Now, I don’t know if you’ve looked it up ever, but I wrote a very technical book on international economics.

Here we have an experiment within U.S. borders that’s been going on for centuries of no barriers to the movement of people, and also have massive amounts of data on the subject. Yet still, each state and local government is given complete freedom to do whatever they want with respect to taxes, regulation, and government spending at the state and local level.

 

Patterns of Behavior

What I tried to do was look and see if there were patterns of behavior. Looking at all of states together for a century, “Are there any patterns that emerge that would allow me to understand what happens?”

Now, forgive me for being simple with it, but think about two locations: A and B. If you raise taxes in B and you lower taxes in A, people and business are going to move from to B to A.

 

Cost vs. Benefit

That’s the theory, but then there’s another part of the theory that says, “How do you get good public services if you don’t tax?” So my opponents say to me, “Yes, they do have higher taxes, but they have better expenditures as well. They have more libraries, better assistance for poor people, more cultural museums.”

Interviewer: Japanese people are always worried about that.

Dr. Laffer: That’s sort of the two models coming together. And I do have a preference of one over the other. Okay, I’m honest with that. But I have no preference when I look at data, when I look at the results. So what I did was look at the facts.

 

The Results of the Introduction of Income Taxes Since 1960

Now, the first chapter is called: The Fall from Grace.

There are 11 states that have introduced an income tax since 1960. They did it at different times, Hanako. The first one was West Virginia in 1961. The last one was Connecticut. They did it in 1991—30 years later.

The governors and legislators of these states were neither Republican nor Democrat. The Connecticut Governor who enacted theirs was Lowell Wiecker, he was a Republican. And you had Romney in Michigan. So a lot of them were Republicans, but a lot of them were Democrats. It’s not a party issue. It’s not a left-wing or right-wing issue either. It’s not Republican or Democrat. It’s not liberal or conservative. It’s just the economics of how they looked at the world. But they did it. And these are natural experiments. Now, I went through this topic in that chapter, and you can see all the different states that did it. There were 11 states that introduced an income tax. Before, they had no income tax, and then they put an income tax. And it seemed, to me, to be a perfect example to analyze “What happened?” So here we are in 2019. West Virginia put in an income tax in 1961. That’s 57 years ago—what happened in that 57 years? What happened with Michigan? They put it in 1972. Ohio did it in 1974. Connecticut in 1991.

 

The Ensuing Decline

Interviewer: They all declined dramatically?

Dr. Laffer: Well, yes, they did. So then I took each of the 11 states and I took the year the income tax was instituted. Then, I looked at the three years before the income tax. I looked at their major metrics and asked, “What was their population relative to the rest of the nation? What was their total output, their gross state product?” I looked at many other indicators, including tax revenues, Hanako. And I looked at all of them compared to the rest of the nation. There were 11 states here. There are 50 states in total, so therefore I compared each of these states to the 39 states that neither adopted an income tax nor got rid of one.

Dr. Laffer: I looked at each state, and I lined up the year they put in the income tax. So I looked at three years before, and I looked at the three years after. Pretty straightforward. Pretty simple. It’s not too much math. Now, in one chapter of the book, I have the math chapter where I do all of the econometrics, but that’s not a normal person who reads that. I wanted to make it so that I could explain it to a normal person who is smart, but who is not trained in econometrics and math. So these chapters are all for normal people. In one chapter, “Why Growth Rates Differ,” you will find that every single one of those states, every one, in every single metric, in every measure, declined relative to the rest of the nation.

It’s so exciting because here you have a real-world experiment going on, right? And that real-world experiment is what really happened. Now, if you look at those states, every single one of them declined relative to the rest of the nation in every measure, including taxes, Hanako. Including taxes. They didn’t get any money. They put in the income tax, expecting to get lots of money. They didn’t get the money. The money left. These people moved to other states.

 

Detroit City Became a Bombed-out City Like Hiroshima

They all declined in every measure—pretty harsh reality. Some of these states, Hanako, declined by huge amounts. I’m going to give you American examples, and forgive me if you will, but when I was a boy in Cleveland my father and mother would take me on vacation to Detroit, Michigan, which was the Paris of North America. It was the most beautiful city. The train station in Detroit was the Taj Mahal. I mean, it was—oh my God, all the buildings, the museums. It was the most spectacular city in the United States. Today, Detroit looks like a bombed-out city. I have one little book I’m going to give you, as well, where I compare Hiroshima to Detroit in 1946 and then Hiroshima to Detroit in 2014. And they switch positions; Detroit looks like it had a nuclear bomb, and Hiroshima looks beautiful.

 

Michigan’s GSP Dropped from 5.2% to 2.7%

In ’46, Hiroshima looked awful. In ’46, Detroit looked like the capital of the world. It’s just amazing. Michigan went from 5.2% of the US to 2.7% of the US. People left in droves, they just went away. You look at Michigan, and in 1950, Hanako, Detroit’s population was 1.85 million. Today, it’s less than 600,000.

Interviewer: Way less than half?

Dr. Laffer: They’ve lost 1.2 million people. It’s just awful. It’s just terrifying.

In my home state of Ohio were the headquarters of more Fortune 500 companies than any other state, and now Ohio looks just like Michigan. Likewise with Wisconsin, Pennsylvania, and all of these states. It’s just a disaster.

 

How Newly Imposed Taxes Caused New Jersey to Become the Slowest Growing State in the U.S.

The one I love to talk about, and you’re not an American so this may not mean quite so much, but in 1965, New Jersey had neither an income tax nor a sales tax. Neither one. It was the fastest growing state in the nation. People from everywhere were moving into New Jersey, and they had a balanced budget. Ten years ago, one of my students from the University of Chicago was the governor of New Jersey—Jon Corzine. Not a good student, however [laughter]. But they had the highest property taxes, highest sales taxes, and highest income taxes in the nation. They were also the slowest growing state in the nation. People were leaving the state like rats out of a sinking ship, and they had a huge budget deficit.

So I did the first part, of which I told you there are two models. One is the growth model, and that model is the first one I explained to you. Remember the two there? Now, the second one is the, “We need the money for provision of public service for roads, for police, for schools.”

 

The Function of State and Local Government and Public Services

Now, let’s look at state and local governments and what functions they serve that are different from the federal government. With regard to state and local government spending, about 50% of it is on K-12 (kindergarten through 12th grade) education. Then they have colleges, junior colleges, and technical schools. Then they have universities. Then they have graduate programs. So those are the primary expenditures of state and local governments. It has always been, by the way. So what I did was I looked at all of the public expenditures for these same 11 states. Now, I didn’t just look at education. I looked at police services. I looked at highways. I looked at fire departments. I looked at prisons. I looked at welfare. I looked at welfare very closely.

 

The Decline of Public Services

Seven out of the 11 states declined in their provision of public services relative to the rest of the nation. Now when I say, “public services,” I’m not talking about total public services. I’m talking about public services per 10,000 population.

When you’re a shrinking state, obviously, you’re going to get fewer public services. So I did a survey of public services per 10,000 population to make sure I’m not biased against the state wherein we have all the full-time equivalent employees. We have huge categories—like 3-400 categories—of public service, but I used larger categories there because I’m looking from a 30,000-foot view, and if you look at this thing, on education, there is another measure.

 

The Resultant Outcome for Education

There is a second measure, which is measuring the quality of the kids’ education. So you have, “How many teachers do you have?” And then you can ask yourself the next question, which is, “How did the children score on the standardized school tests?” So it’s two different ways to look at education. One is an input measure. One is an output measure. I did that for all of these public services, as you will see, and I looked at the NAEP scores, which are the National Assessment of Educational Progress (NAEP). It’s done by the Department of Education. It’s a federal measure. The NAEP scores are tests of fourth grade and eighth grade in every state, every two years. They look at English and math scores. After looking at English and math in the fourth and eighth grade, there’s a common test they use for every state, and that was one of the measures I looked at as well. But the bottom line on all of the public services is that seven out of 11 of the states declined in the provision of public services. Declined. And the four that improved were by a small, small amount. Some of the ones that declined were by a very large amount. Now, three of the ones that declined were by a small amount, too. So many of them just stayed in sort of in the same little range, but a bunch of them, four or so, dropped dramatically. It’s just terrifying. That’s the first chapter, “The Fall from Grace”, and I went through that in great detail.

 

9 Zero Income States Outperformed the Highest Income Tax States Without Exception

Dr. Laffer: Now, I explained it to you superficially here, but the next chapter is called The Nine Members of the Fellowship of the Ring to Balance Out the Nine Nazgul. Did you ever see the movie of The Lord of the Rings?

Interviewer: Yes, I did.

Dr. Laffer: My grandchildren, again, gave me this title. I looked at the nine states today that have no income tax, and I looked at the nine states that have the highest income tax. How did they do? So, I looked at them, and now, obviously, in any one year you can have a strike or something else, discover oil, blah, blah, blah, all that. So I took a 10-year moving average of the nine zero-income-tax states and a 10-year moving average of the nine highest income tax states and went back 50 years. Now, when a state brought in income tax, I would change the number of both zero and the highest. So, I made it the same number of states for each group. Didn’t matter much. I went back 50 years, looking at the major metrics again: population growth, gross state product growth, employment, tax revenues, all of these numbers. And every single year for the last 50 years, every single year—now, it’s a 10-year moving average—these zero-income-tax states have way outperformed the highest income tax states. Not one exception.

Interviewer: Not one exception?

Dr. Laffer: Not one. Sometimes the differences are very large. That’s in the second chapter of the book. Now, in that one I didn’t go to public services very much because I did that in the chapter titled, “Fall from Grace,” and it’s very hard to do the public services because, other than education, there’s so many of them there. And public services are not all the same. For example, do you want to have a lot of people working in welfare?

Interviewer: No.

Dr. Laffer: No. Do you want to have a lot of people working in education? Yes.

Interviewer: Yes [laughter].

But they lump them all together as public servants. So, therefore, if you have to separate, “Which jobs do you like? Which jobs you don’t?” Spending the same way. If you pay people not to work, they’re not going to work. And if you tax them if they do work, they’re not going to work [laughter].

Then I went in, and I had a long, long, long chapter on California versus Texas.

 

Texas vs. California

And they are the two extremes of big states. It’s amazing what happens, Hanako. It’s amazing. Texas has much lower tax rates than California. Much lower. But they also pay much less for public services. They also have much less tax evasion and tax avoidance than California because of their tax rates. They also have much smaller departments and agencies to remove—much less regulation, so while they have much lower tax rates, they have much better public services. They collect like 60% less in taxes, and they spend about 30% more in the final because of what I call, “the fiscal leakages.” People in California try to avoid paying taxes.

Interviewer: I see.

Dr. Laffer: And the rich ones move out.

Interviewer: Yep.

Dr. Laffer: And poor people move in. So because of that, the discrepancy diminishes, and then they have a much less efficient transfer of tax. They get the tax collection agency to collect the money. Then they have to transfer it to the departments. Then the departments have to find out the people who are going to get the money, the requirements of those people. I looked at five fiscal leakages from the tax rate to the actual spending, and the leakages for Texas are very small. For California, they’re very large. What turns out to be less in tax collections is more in money spent. You’ve got to read that chapter. It’s just astounding. A mile of highway in Texas costs one-third the amount of a mile in California.

Interviewer: One-third?

Dr. Laffer: Yeah, you’ve got to go through that chapter.

When you look at it, you’ve got to look at the actual numbers, but it’s huge. What it costs for a day for a prisoner in Texas, and what it costs a day for a prisoner in California, it’s a huge difference.

 

Tax Increases Cause California To Create a Huge Budget for Tax Collectors

Interviewer: Why can’t California build it in such an inexpensive way?

Dr. Laffer: Because of taxes and because of regulations. Because people always adjust to it. They always adjust. If you’re a rich person in California, and you’ve got a high tax rate, you’re going to try to reduce your tax impact. So, if you want to, you’re going to try to leave, or you’re going to try to find a tax shelter. Capital gains does not pay taxes unrealized in Cal. So all of this adjusts, and then what you find is the amount of money they collect goes down. Then you find all the processes of spending because, in California, they have to spend a huge amount of money on tax collectors because everyone’s trying to get around the taxes. So, therefore, they spend much more money on trying to collect their taxes than Texas does because people pay their taxes in Texas. So they spend way more money on tax collection agencies and on spending. It’s just amazing. California has one of the lowest number of teachers per 10,000 population of any state.

Interviewer: Lowest number?

 

Educational Costs: Right to Work and Unions

Dr. Laffer: Yes. And it has the most spending of any state. Teachers in California are the highest paid teachers in the nation, and the school test scores are very much the lowest in the nation.

Interviewer: I heard it’s the fourth worst state in terms of education.

Dr. Laffer: Yes, that’s true. And yet, they spend the most.

But this is part of the problem. Now, Texas is a right-to-work state. You’re not forced to be in a union. In California, you’re required to be in a union.

They force participation in a union. That’s the one I did there on that. I also did the econometric chapter in that book, as you know. And I also did, as you may know, I put, “Au Contraire mon Frere,” that last chapter which I have had a number of debates over the years with professional economists, and I have tape-recorded those debates.

Interviewer: Wow, that must be very revealing.

Dr. Laffer: Well, sometimes the speeches are tape-recorded naturally. So when we get an issue, “What are the primary issues, and what do the other professors say?” I go through each of those questions, each of those debates, and I quote exactly what they said and then answer it. Now, I put in the debates there, but I answer the things exactly. So that chapter is answering questions from people who are critics of mine.

Dr. Laffer: Now, since then, I’ve done a lot of work on states. And this is what you want to talk about today, isn’t it?

Interviewer: Yes.

Dr. Laffer: Okay, because I’ve just recently done the state study. Now, I’ve done a state study for many states. No one else does this. I did it for California with Proposition 13. I did a lot of papers, and then I wrote my book—I don’t know if you’ve seen that book, but “Eureka”, which is how to fix California.

Interviewer: No, unfortunately I haven’t seen it.

Dr. Laffer: I wrote this book on California, which is “Eureka”, and how it is and what happens. This is a detailed state study of California. That one chapter in “The Wealth of States” is between Texas and California. I’ve done several major studies of Texas as well. I’ve done major studies of a lot of states. Recently, I went through 15 or 20 major state studies. Let me tell you about what has happened in the state of Missouri.

 

The Absurdity of Taxation in Missouri and Other States

Dr. Laffer: I just finished this study six months ago, and this is to just give you a flavor of what we’re up against with bad governments. I almost want to cry because it’s so bad, and it’s so difficult. There’s almost no hope, and I think maybe this is helpful for Japan, too.

Interviewer: Yes, I hope so.

Dr. Laffer: Now, remember Missouri is a state in the central part of the United States. St. Louis is its biggest city. I love St. Louis because they have the largest Laffer Curve in the world. The Gateway Arch.

Interviewer: Oh, yeah [laughter].

Dr. Laffer: Do you know the other one? I go to it all time. It’s McDonald’s, and it has the Golden Laffer Curve [laughter].

Interviewer: That’s so funny.

Dr. Laffer: It is. Let me describe the situation. Missouri has six million people and has been in a tailspin like this for a century. I look at Missouri’s output as a share of US output, and it’s just been going down, way down. It’s just terrifying.

 

Sales Tax Overdose

Dr. Laffer: Here’s what I found. I talked to many politicians in Missouri and they don’t have a clue as to what I’m saying: the governor, the state legislator, all of the officials. Now just think of this: in Missouri there are 2,339 separate sales tax jurisdictions.

Interviewer: That’s a huge number.

Dr. Laffer: Amazing. You can walk off over across the street, and there’s a new sales tax.

Interviewer: That’s inefficient.

Dr. Laffer: Yeah, 2,339, and that was a year ago. There are probably 2,500 now. Now, remember, the average jurisdiction is 2,300-and-whatever people, and yet, within each of those, there are upwards of eight separate entities authorized to impose a sales tax. There is a school district, a fire district, there’s a development district.

 

The Tax Maze of Absurdity

Dr. Laffer: Now, on average, there are only 4.7 tax authorities per district, but in some districts, there are eight. What they do is each one levies a sales tax, and then they’re stacked. So you pay the sales tax of all eight or all five or whatever it is. You don’t know which is which, but they are levied and taxed on. But each of these has the authority on its own to put in a sales tax. It is wild. Are you not starting to cry?

Interviewer: Yes. Do the authorities talk to each other?

Dr. Laffer: No. They’re different. The school district needs a new building, so they add to their sales tax. The development district over here wants to have a new highway thing, so they add to the sales tax. Each one does it, and they’re all in separate districts, too. I mean, one authority may have the ability to tax in 15 different districts, but it goes into each district. And then another one may have 12 districts, but they’re not the same. It’s amazing.

Okay, so you’ve got 2,339 separate districts. You’ve got up to eight separate taxing authorities. On average, 4.7. Then you have separate sales tax schedules for 15 different categories of goods. For example, Bibles have one sales tax that’s different than movies. Then they have grocery store sales which have a different tax base than a restaurant food. So there are 15 separate schedules for products.

Dr. Laffer: It is not unknown to the Japanese people either, believe me. And I’m saying this because I know this issue. I don’t know Japan like this, but I know it’s not different.

Now, we’re not through yet, Hanako. There are five separate tax schedules for the purchasers of goods. A university is a 501(c)(3) organization. So they don’t pay sales tax on this, that, or the other. And this one and that one and the other one does pay sales tax on this. So now we have 2,339 separate districts. We have eight authorized sales tax-imposing entities within each district.

 

Constitutionally Mandated

We have 15 sales tax schedules for all products. And we have five separate categories. No one knows what’s happening at all [laughter]. Now, the whole argument in favor of a sales tax is that it is a local tax that will serve local needs. But when you look at this, there’s no sales tax where the revenues go to the people who pay those taxes. It won’t. And then—you want the final problem? The legislators, these brilliant people—not. These brilliant people have put all of these sales tax schedules and laws into the Constitution of the state of Missouri.

Interviewer: Really?

Dr. Laffer: You can’t get rid of it. The governor and the legislators cannot. You have to have a vote of the people to change that.

Interviewer: That’s terrible.

Dr. Laffer: In Kentucky, I did a study for the governor there, Matt Bevin. In Louisville, Jefferson County, there are 105 separate property taxes.

Interviewer: Oh, so many.

 

Who’s on First?

Dr. Laffer: The school, all these others. Now, I’m talking sales taxes in Missouri. I’m talking property taxes in there. And by the way, the sales tax differences are not that great either. No one knows what your property tax rate is, what it applies to.

In Ohio, there are 1,440 separate income taxes [laughter].

And what am I supposed to do with all these? I’m 78 years old, Hanako. I look at Japan, and I cry. When I look at Japan, I see the same thing. I see companies in Japan who spend their time lobbying the government rather than producing good products.

 

The Growth of Dr. Laffer’s Lifelong Interest in Economics

Dr. Laffer: I’m going to talk to you today, personally—I was from quite a wealthy family. My father was head of the 90th largest company in America, CEO and chairman for 25 years. My grandfather was a brain surgeon at Western Reserve Medical. He was a professor at the University of Vienna in Austria. We were bilingual—I still am bilingual, German and English. My grandmother was third in the suffrage movement in Cleveland, which was a big city then. My other grandfather started four steel companies. He was a very, very successful and wealthy man. My mother was probably the most politically important woman in Cleveland; head of the grand jury, two separate appointments. Very big. So, I come from a very, very privileged family. I went to the same preparatory school my father did, and my brothers did. I went to Yale. I’m fourth-generation Yale. My father was an alum. Both my brothers were. My daughter is. My son-in-law is. My nieces and nephews, they all are. So I have had a very privileged environment.

Interviewer: And you’re gifted?

 

The World Is a Miracle

Dr. Laffer: Well, gifted in that—and I wanted to study economics because I loved it. I didn’t do it to make money at it. I didn’t do it to get power, to control your life. I did it because I look at economics, and I look at this world around us; it’s all a miracle.

Interviewer: Wow.

Dr. Laffer: Isn’t it? I mean, look at these chairs. They were all made by economics. All these goods move and all these productions occur. I mean, it’s amazing. This thing we call the economy is a gift from God. I mean, it truly is.

 

Awe in the Economy

Interviewer: Your thoughts appear close to those of Adam Smith.

Dr. Laffer: It is Adam Smith. I mean, you sit back and you go, “How does that sculpture actually happen? How does the food get to the restaurants?” Do you remember Milton Friedman’s lecture in “Free to Choose” on the pencil? I stand in awe before the economy. I’m not here to try to control it. I’m here to try to understand it. It’s like the universe. It’s like physics and the universe. How did this universe happen with all the particles, the plants, the big bang? I mean, is it not wonderful?

Look at who you are, Hanako. You look at your genome, your 23 chromosomes there, your genes, your four base pairs. If you tear a base pair, the double-helix and tear it this way, you get the exact mirror image of it that way. So, when it meets with another gene, they can perfectly match, and you can pass on traits. How did that happen? How does a drop of blood get from your brain to your lungs to your foot? I mean, how did evolution occur? How do horizontal genes transfer? How did you get this endosymbiosis? I mean, Hanako, this is the most miraculous universe, and God was pleasant enough to give me a brain large enough that I could start to try to understand what’s going on. I didn’t try to understand it to control your life. I didn’t. To understand the beauty of, “What is the universe?” That’s the same way that Darwin did it or Huxley or any of the others. I come from a wealthy family that had the resources to be able to get me to the private schools, to get me to go to my college, Yale. To get me to good grades there. To get me to go to the Ph.D.—well, the MBA program first, then the Ph.D. program, so I would have enough knowledge to be able to try to contribute to the understanding the universe.

 

Our Responsibility to the Planet

Dr. Laffer: I don’t say this to other people, but the universe did pretty well without us.

We’ve had 4.5 billion years of this planet circling this sun, and evolution of life on Earth and all of that. Our job, yours and my job, is to maintain the beauty and the wonders of the universe.

Now, look, if a guy has a big green thing growing out of his ear, and all 10,000 people who have had that died, yes, I would suggest, “Maybe we should have surgery, but only very reluctantly should you interfere with the body’s defense systems.” You should try to understand what the body’s defense systems are.

 

“Don’t Just Stand There – Undo Something!”

My view of life is that when you look at something, “Primmum non noncore,” if you know Latin, which is first of all, “Do no harm.” Don’t just go grabbing at things and doing things. And if you do have a world there and you are going to do something, the first thing you should look at is, “Vis medicatrix naturae,” which is “the healing power of nature.” Now, what we did under Reagan was different than anyone else, “Don’t just stand there. Undo something.” The old phrase is, “Don’t just stand there. Do something!” No, ours is, “Don’t just stand there. Undo something.” We took away taxes. We took away regulations. We got the government out of the lives of the natural universe, and you can see how well we prospered during that. So that is the way I look at the world. That is my view of my life and physics and science and family and all that.

It’s a very different way of looking at it than Paul Krugman does. And that different way of looking at it and that different attitude towards the world comes up with different answers.

 

Why Has Detroit Been Destroyed?

Interviewer: Is this really Detroit?

Dr. Laffer: Yes.

Interviewer: In 2010?

Dr. Laffer: Yes. Isn’t that shocking?

Interviewer: Shocking.

Dr. Laffer: I mean, does that not tell a story? And then I used the Aeschylus quote, and when you look at this, and at first, it’s funny, and you giggled and all that, but then you think of it, how many people have lost their lives here? It’s not funny. How many people have lost their lives here? It’s not funny.

Interviewer: It’s almost the same?

 

An Economic Bomb

Dr. Laffer: Oh, it’s terrifying. When the bomb went off in Hiroshima, it was horrible.

Interviewer: Yeah, about 100,000 have lost their lives.

Dr. Laffer: The same bomb went off here. Not the same bomb, it’s economics. It’s an economics bomb. It is.

So I got the old Greek quote translated into English from Aeschylus, “And even in our sleep, pain that cannot forget falls drop by drop upon the heart. And in our own despair and against our will comes wisdom to us by the awful grace of God.” We need to learn from these mistakes, Hanako. Every page in here is an economic example. I’ll give you the page on Japan. I tried to represent Japan in one page.

 

Looking at Other Nations

I’ve also got it here for Sweden. This is Sweden. This is Turkey with Erdoğan. This is the Khaldun Laffer Curve. This is the story of China, “The Dragon Returns: The Story of China.” China’s had the most miraculous recovery and life itself. There’s the UK. I worked with Lady Thatcher, as you know, throughout all the period there. This is the story of Sweden, Japan. All right, here it is, “What a Tax System Should Be.” Here’s the tax system of the Isle of Man. Here it is for Hong Kong taxes.

Interviewer: You made so many comparisons?

Dr. Laffer: Yes, that’s just of countries. Then I have all of this stuff that we’ve talked about here in the States. “Down and Out in the Motor City,” this is the story of Detroit. This is tax structure; this is the movement of money from one state to the next state, all the migrants there. Kentucky, this is a property tax example. This is what I did in North Carolina with Governor McCrory. I went in there. We did the reform. It’s the most amazing miracle that’s ever occurred. “Blessed by God, Virginia,” here. “Taxes are people-repellant.” Who says you can’t have low taxes and great services?

 

A Look at Tennessee: A Success Story

Now, let’s look at Tennessee. We have the lowest tax state in the nation here. We’re the fastest growing state in the nation.

Interviewer: I heard that.

Dr. Laffer: We have the biggest surplus of any state in the nation, and we have the biggest improvement in public services of any state in the nation.

Interviewer: I’ve heard that many people are coming in to Tennessee.

Dr. Laffer: Yes, but it’s not by luck. We have no income tax. No estate tax. Lowest property taxes, seventh lowest in the nation. And if you take all government spending, etc., we’re the lowest tax state in the nation. People are coming here. Remember that example?

Interviewer: Yeah.

Dr. Laffer: That’s it. And I have here all the macroeconomics. Hanako, there are lots of other things that matter. It’s not just taxes. It’s not just spending. It’s not just economics. It’s warmth. It’s sunshine. It’s beaches. But economics matters, too, and economics is like the drip, drip, drip. You have oil discoveries one day and losses the next day, but economics, “Drip, drip, drip,” always pushing in the same direction. It’s like gravity. Gravity is the weakest force of the four forces. Yet, gravity dominates the universe because gravity always works in the same direction.

 

The Role of Tax Cuts throughout Modern Economic History

Here are all the macroeconomic ideas. All the stuff you’d like to see, and all the Stuff—each one is one page. Here are the Harding and Coolidge tax cuts. Here’s what happened. Here’s what happened here with the Kennedy tax cuts. Here’s what happened with the Reagan tax cuts.

 

Why People Suffer

Dr. Laffer: You see the front page? (pointing to the North Korea with no light)

Interviewer: No light.

Dr. Laffer: Does that not tell the story?

Interviewer: Yes.

Dr. Laffer: And what do you say to these people? Hanako, what do I say? And you understand now why I cry? I look at a baby, I’m sitting there in Saint Louis, and I arrive late, it’s about 10:30. I went with Nick, and we found the only restaurant open. It was called Applebee’s. We were going to get a hamburger or something. I was hungry. I was going to the restaurant. They had no food at the place. So Nick and I go in there, and this 35-year-old black woman comes in with six kids; cutest, loveliest, beautiful little kids you’ve ever seen, and then you imagine what will happen in their lives, and you cry. They don’t have a chance. In some of the cities in Missouri, over 30% of the revenues came from fees, fines, and assessments. Those are speeding tickets, parking tickets, loitering things, fines for having a dirty yard, whatever it is. And guess what those neighborhoods are? The poorest. And these kids? There’s not a chance for them. They don’t have a chance in this world. And you see these beautiful little kids and you know exactly what’s going to happen; when they’re 18, 19, and 20, they’re going to be criminals. It’s going to be that Elvis Presley song, “Born in Ghetto,” if you remember that? We’ve got to change the world.

 

Pension Reform

Interviewer: May I ask you about pension reform?

Dr. Laffer: The best pension reform is when the government gets out of the business [laughter]. The second-best pension reform is what are called IRAs or Roth IRA’s where you put in the money and it’s yours. You get to determine how it’s invested, and you get the results of it. The problem with pensions is you put in the money that I make.

On the pension reform, it’s very simple. You want to have accounts for each individual and have people invest their own money and bear the consequences of their own actions. Once you make it a welfare system, it’s lost everything. And that’s the first thing I’d do in Japan. The government is taxing workers and giving it to old people. That’s what has to be done with pensions, but that’s all part of details, this, that, or the other. When you have a bad mindset, you’re never going to come up with a good answer.

 

The Effects of Social Security and Work Incentives

Interviewer: We spend one-fourth of the government spending on social security.

Dr. Laffer: I know. It’s terrible. And you’re paying old people not to work.

Interviewer: Right.

Dr. Laffer: And you wonder why young people don’t have any children. Well, having children is an expression of the love of the future. I have six children, and when you have a child, it’s your investment in eternity. And when they’re destroying your future, it seems futile to bring a child into Japan. What will it be like in Japan in a century? Now, you were telling me about the population of Japan, and it’s true.

 

Population – Eroding Estimates in Japan

The United Nations estimates on population, which are the pessimistic ones — they are — but the de-estimates have it that Japan today has about 120 million people. What is it in a century? It’ll be 25 million people. Help me. Look, I’m not one who wants to overpopulate the Earth and kill every animal. I’m not. But I also like humans, too. We don’t have to go to zero [laughter]. Humans are not an awful animal. There probably are too many of us, but Japan is not the world’s problem. It’s not, and it’s sad.

This makes me very, very sad. Can you imagine a world without Japan? I can’t. Japan is so interesting, so wonderful. And then they have all of this stuff today, Hanako, where I’m an old, white Christian male. I’m the most hated animal on Earth [laughter]. But I am. In this country, I’m a racist. I’m a warmonger. Oh, no, I’m not. But that’s what they say. And the differences between girls and boys, between tall and short, between black and white, between Japanese and Eurasian or European or whatever, old and young, are to be celebrated, are to be relished. It’s wonderful, the differences. It’s not something to hate one another for.

 

The Beauty of Diversity

The beauty of this Earth is our diversity. It’s not something to be on your guard about. It’s something to embrace. I love it that there are girls. I love it that there are boys. And I love it that boys like girls, and girls like—it’s wonderful. And I love it that I have grandchildren and I’m old, and that when I was young, I had my grandparents. And it’s wonderful. You’re going to see my philosophy in life, and it’s something we should all work together. Yeah, you’ve got to make sure that it’s not exploitative. You’ve got to make sure that you look at the world with love, not with, “Who’s doing it? What’s happening down there? Who is it? It must be, you’re looking at, “Oh, God, look at the cool people.” It’s a different way of the world.

 

The Architect of the Enterprise Zone from Kemp and Reagan to Trump

Interviewer: How do you see President Trump’s infrastructure plan, especially, his plan on enterprise zones?

Dr. Laffer: Yeah, enterprise zones would be wonderful. I wrote that in 1974 because I looked at the black communities in Chicago where I lived, and I’m an author of enterprise zones. I did it for Jack Kemp and for Ronald Reagan, and I looked at the enterprise zones. I lived in a black neighborhood—all black. I was about the only white family. I taught at the University of Chicago, and it was delightful. I mean, scary at times. Don’t get me wrong, it was scary at times, but it was delightful. It was a wonderful experience.

 

Lifting Poverty

And here is this community in abject poverty, hating each other, wasting everything, drug addicts, all this stuff. What do you do? Now, I’m not black. I don’t have a black experience so I don’t know of this, but they wear their clothes down…

They say bad words all the time. And so I decided that the problem they miss is the problem of economic opportunity. So I wrote something, and I got it from international trade, it was called enterprise zones. In international trade, it’s called free-trade zones. Many of the major cities in the world back then had little areas of the city which were called free-trade zones where the ships would land, take off the products. If they brought it into the main area, they had to pay the taxes and all that, but in the free-trade zone, it was like a no-man’s land.

And so the first thing I did was any company located in the enterprise zone—and you could draw a line right around it—any company located in the enterprise zones that hires a person who resides in the enterprise zone, has his domicile in the enterprise zone, they have no payroll tax, neither an employee or employer. Period. Now, you may think about this as being a big loss of revenue, but it’s not. No one’s working there anyway. No company’s operating there anyway.

So, first is no payroll tax for the employee, but you have to have the requirements: primary residence is in the enterprise zone, and the company’s offices are in the enterprise zone.

Number two: no income tax, neither corporate nor personal, up to $50,000 a year. For the person in the enterprise zone or the company that operates in the enterprise zone, again, you have to have the residential requirements to make sure of that. But it’s pretty simple. No income tax there. So, no payroll tax and no income tax up to $50,000. You can’t have a billionaire move in there all the sudden.

Number three, if you know the inner cities of the United States, you know it’s the government exploiting these people terribly. There must be a thorough review of all building codes, regulations, restrictions, and requirements in the enterprise zone to make sure that none of those surviving regulations, restrictions, building codes etc., have the effect of destroying economic growth. Now, in Chicago, where I lived, they have city-wide building codes. The books would cover the whole wall, these huge volumes of all the codes there.

 

Exploitation

Interviewer: Regulations?

Dr. Laffer: Oh, very big, yes. One of the supervisors would come into a person’s business. He’s frying chicken, a black guy, he’s trying to sell it. He says, “Excuse me, but in volume 74 of the building codes, footnote 735 on page 197, your bathroom has to be at least 21-and-a-half feet from your kitchen. And I measured it, and it’s only 19-feet, 10 inches.”

Interviewer: So it’s prohibited?

Dr. Laffer: Well, it’s prohibited, so he wants to get paid off, and that’s what it said. These things have killed the inner cities, as I’d told you that one area, the municipalities—they made it illegal in Missouri—but 30% of revenues for fees, fines, and local assessments that’s for these areas to get rid of these guys to make sure that they’re not anti-economic development.

 

The Teenage Minimum Wage

The fourth, we have something called a minimum wage in this country, all right? If you look at these kids in the inner city, those six little kids behind that girl, what they’re going to be like. They’re not going to speak English very well. They’re not going to know how to handle things. They don’t know how to wash. They don’t how to speak. How do you get them into the labor force? How do you bring them in?

So, what I suggested was you get rid of the teenage minimum wage. As it is now, Hanako, these kids come out, they’re 17, 16, they leave high school, they leave school. They’re really very primitive. They can’t speak—it’s really sad. Their parents are drug addicts. Oh, my God, the people they live with. And here they are, and they aren’t worth $15 an hour.

Interviewer: Right.

Dr. Laffer: So they never can get that first job. Being unemployed for a couple of years, sooner or later, they become unemployable. After being unemployable for a couple of years, they become hostile and angry and mad. And then you have to protect yourself from them. That boy, Michael Brown in Missouri, in Ferguson, if you remember the case that the policeman shot him. Here’s a young man, 18, 19 years old. Six-foot-four, beautiful. I mean, physically strong. No chance. He’s stealing from the guy in the store. He’s angry at the cop. The cop finally kills him. It’s not the cop’s fault. It’s our laws. We’ve destroyed this whole group of people for eternity. And that’s why I wrote something called Enterprise Zones. I wrote it in the ’70s.

 

An Idea of Freedom

Interviewer: You are the architect.

Dr. Laffer: Yes, that’s mine. And I wrote it, and that was the four-part plan; no payroll tax, no income tax, thorough review of building codes, regulations, restrictions, requirements, and also no teenage minimum wage to bring these people back in. That was my first proposal in 1975. I looked everywhere for people to buy into this idea of freedom. And I found two people who liked it. I went to all my Democrat friends because then I was a Democrat.

But the two people who liked it were two white men. One who wishes he were black, and the other one has never met a black: Jack Kemp and Ronald Reagan. And we then started enterprise zones, and this is how we free the world, “Don’t just stand there. Undo something.” Well, you’ll see all of the enterprise zones there in the book, the template, the original stuff, the new stuff. A single woman with one child in Philadelphia today makes $27,000 a year. If she works really hard and makes up to $57,000 because of her additional income, this means she loses her welfare, and it means she has to pay taxes—payroll taxes, income taxes, etc.—that she gets no more at $57,000 than she gets at $27,000. Why should she work harder?

 

Helping Japan

And it’s a tragedy what we’re doing to the black population, too. Michigan, as well. And to Japan. It’s so sad what’s happened. Help us help Japan. You don’t deserve to lose faith in your country. It’s not your fault what’s going on in Japan. It’s not that reporter-who-was-here-the-other-day’s fault. But you all are damaged by what has happened since 1989. Since they put in that damned tax.

Interviewer: Yes, the consumption tax.

Dr. Laffer: Nikkei went from 38,900 to 21,400?

Interviewer: Yes, it became almost half.

Dr. Laffer: After 40 years, it’s less than half.

God bless you and good luck on your mission.

Interviewer: Thank you.