Dr. Arthur B. Laffer contributed to flattening the tax system through large-scale cuts during the Reagan, Trump and Thatcher administrations. Continuing from the last interview, Dr. Laffer once again described the meaning behind flat tax.

Interviewer: Hanako Cho

Cho: The flat tax makes it very clear compared to the progressive tax system. And everyone pays their fair share.

Dr. Laffer: It’s very easy and fair. It’s also logical. If you’re a rich person, what would you think of a 90% tax on your income? Would you think that’s fair?

Cho: No, it discourages people from working.

Dr. Laffer: It’s just discrimination against the rich. [The government is] stealing your money.

If you make a flat tax, everyone knows that’s fair, so they’ll voluntarily pay their taxes.

If I make 10 times as much as you do, Hanako, I should pay 10 times as much in taxes. That’s simple. I should not pay 1,000 times more than you do. No, that’s not fair. The best students get the best grades. You shouldn’t give bad students high grades and good students bad grades. But that’s what the government tries to do. They try to tell us that the rich people don’t really deserve the incomes they have.

A Country Will Sink Into the Swamp When You Discriminate Against the Rich

Dr. Laffer: If the people believe that, we will become like Bulgaria or Ethiopia. Look at any country that has sunk into the swamp. When you discriminate against the most successful people, your country falters and goes down.

Bill Gates is not an enemy of the people. Bill Gates developed products that are wonderful. It’s the top 1% of your population that makes your country great. It’s not the street sweeper. Every country has a street sweeper, but not every country has a genius in business and a creative of wonderful value.

When you look at what happened to the Japanese and German development after World War II, it was the creative genius of the industrial enterprises of Japan that brought Japan back into the world.

The same thing is true for the United States. Those are special people that make us great, not our average people. You want to reward special people, and you want average people to become special people. Therefore, you want to incentivize average people to create great things.

Current Tax System Prevents the Poor From Becoming Rich

Dr. Laffer: The tax code today is over 70,000 pages. It’s so complicated, arcane and confusing that no one knows what’s in there except very high-priced experts.

Let’s imagine some person in the inner city develops a product that is wonderful. Everyone loves that product, and they all buy it from him or her. Let’s imagine that person starts making lots of money. They don’t know how to hire tax accountants or tax lawyers, so they get all of their income stolen. What the tax codes do because of their complexity, confusion and arcaneness is guarantee that poor people can never become rich. It holds the lower classes down. All the lower classes say they want to tax the rich, but when you tax the rich, you guarantee that poor people will never be able to achieve their dreams.

That’s what the tax rates do. They discriminate against the poor, the minorities, the disadvantaged, the young, the helpless. They don’t allow them to ever make it. Ever. It’s so sad because America should be the country of opportunity, not the country of holding people down.

Building a Prosperous World Through a Flat Tax

Cho: Can you please tell me about the relationship between economic growth and flat taxation?

Dr. Laffer: The flat tax will do two things. The first thing it will do is that the economy will grow fast because it will catch up to a much higher productivity level.

Let me tell you that everyone with capital in the United States allocate their capital and labor based on tax rates as much as by economic opportunity. Once you put in a flat tax, all of your tax reasons for allocating capital and labor disappear. The only reason you’ll allocate capital and labor is because it is productive. You won’t have lawyers, accountants, lobbyists and unproductive sort of leeches on society. They’ll all go into productive work. There’s a huge increase in the level of production.

Once you get up to a higher level of production on the efficient path, your growth rates will be higher as well. You’ll save more because the returns are higher. You’ll work more hours. You’ll try to get rid of a low-paying job to get a high-paying job. All of those things will happen.

You will no longer spend time trying to figure out your taxes. You know what your taxes are immediately. If someone pays you $100 and the flat tax rate is 13%, all they do is subtract $13 and give you $87. And it’s true for everyone. So there’s no difference there. And all of this clutter, all of this clogging, all of this sclerosis of the tax system disappears.

Not only do you have to pay $13 in taxes, but your company will deduct it for you. You won’t even have to file a tax return. So that’s the way it’s done. Businesses are very good at collecting money. And when you have a flat tax, businesses can collect all those taxes cost-free.

Not only will you move your level of production way up, but the growth rate of production will also increase.

Tax revenues will also go up. If you take into the effect of the Laffer Curve, you can expect further revenue growth. Employment will increase and the number of people eligible for benefits will decrease, so the cost of unemployment benefits and food stamps can be reduced. Rather than relying on taxing people to balance the budget, a healthy and powerful economy provides the conditions for achieving a balanced budget.

Post-War Japan and Germany Became Supply-Side Nations and Achieved Prosperity

Dr. Laffer: If you go back to Japan and the post-World War II era, Japan grew like mad because they cut tax rates dramatically. The U.S. troops under Douglas MacArthur imposed very high taxes on Japan. They imposed a very socialist, almost a communist government in Japan with high taxes. The Japanese very politely said thank you to General MacArthur and proceeded to cut those tax rates dramatically. That’s why you had such an amazing growth until 1989.

The same thing happened with Germany. The U.S. under Eisenhower imposed very high taxes on Germany. Then, the Germans cut those tax rates under Ludwig Wilhelm Erhard, who then served as Bundesminister für Wirtschaft (Ministry of Economy) and eventually became Chancellor of West Germany. The two fastest-growing countries in the post-World War II era were Germany and Japan because they were the two most supply-side countries.

Government Will Take Over the Private Economy By Splurging

Cho: Biden is going in a completely opposite direction. The White House projects a GDP growth of 5.2% this year and 4.3% next year but projects a decline to 2.2% in 2023 and 1.9% for eight years after that.

Dr. Laffer: They’re forecasting much higher than it really will be. It will be even lower than they say if they get their policies. I have been using the phrase here in the U.S. in large part because of you, the ‘Japanification of America.’ If we follow this, we’ll follow the slow and bad policies of Japan.

Cho: What do you think the Biden administration will do if a new variant of the coronavirus threatens the U.S. again?

Dr. Laffer: They’ll shut everything down. They would use the coronavirus as an excuse to control you.

Let me tell you what they’re doing with the spending.

They are thinking of issuing huge debt, and then distributing the money all over the place. Sooner or later, all of the assets in the United States will be government debt. As the years go on, government debt will keep increasing to the point, where effectively, the government controls every company.

Let me use Japan as an example because they are at the forefront of becoming socialist on this issue. Government debt in Japan is continuously increasing as the years go on.

As the Japanese government is working with the Bank of Japan to purchase corporate bonds and stocks, the private sector’s share of transactions will become smaller and smaller. This is a way of the government to take over the means of production, of socializing the entire economy, which is very bad for economic growth and prosperity.

If you own a business in Japan, the way to make that business successful is to go and get help from the government. It’s not providing a good product. It’s lobbying the government for help. That’s why we are working very hard to stop [the government] from interfering with the market.