Behind-the-Scenes Look at Trump’s Historic TCJA (Part 1 of 2)

The Tax Cuts and Jobs Act (TCJA) was passed during the Trump administration, becoming a historic bill that created many jobs and increased tax revenues in America. Little do we know that there was a fierce battle before the tax bill was passed into law. The Liberty spoke with Dr. Laffer, one of the authors of the bill, to understand what happened behind the scenes.


――Cho: You are the author of the TCJA that was passed in late 2017 under the Trump administration. This bill was heavily criticized, one notable criticism coming from the Tax Policy Center. When they claimed that the TCJA would result in a $6.2 trillion tax revenue loss, you provided a theoretical rebuttal to the folks at the Tax Policy Center in September of 2017. The paper you published from the Committee to Unleash Prosperity became a bible within Congress and the White House. Would you share with us your experience at that time?

Dr. Laffer: I had a funding of $200,000 by the Searle Freedom Trust to develop an econometric model of the U.S. economy. I looked statistically at U.S. GDP, tax revenue growth and all of the major variables which was the key to the model.

This is a mathematical econometric model of the U.S. economy that I developed at great expense, where I looked at the relationship between GDP growth, government spending, transfer payments, purchases of goods and services and all sorts of taxes. I looked at the average tax rate, the highest marginal tax rate, income taxes, the corporate tax rate, the payroll tax rate and the capital gains tax rate. I looked at all of these tax rates in the model.

Let me just say that the most amazing thing happened in this. I did not constrain the model or anything of the sort, but every single variable in the model came out in the a clear direction and [it was] very statistically significant. What it showed is that the higher the personal income tax rate, on average, the slower the economy will grow. The more progressive the taxes, in other words, the higher the highest rate is relative to the average rate, the slower the economy will grow.

It showed that the corporate tax rate is a major determinant of growth, and the higher the corporate rate, the slower the growth. Now, these are just the statistics. I didn’t impose this. This is what actually comes out of the data. I then went through and looked at the payroll tax. Each one of these taxes cause growth to slow down, some of them much more than others but all of them very statistically significant.

I called this paper “Vis Medicatrix Naturae,” which is the healing power of nature. The first one-third of the paper was the sort of theoretical description building up from a demand curve to a supply curve, two factors of production, different goods, the stuff I’ve done all my life. It was an academic build-up of the model. The second part of the paper was a narrative. It had some charts, but it was not mathematical. It was a narrative of what has happened in the U.S. from the beginning of the income tax to the present. The third part of the paper was this econometric model. The model worked out beautifully.

I used that model and those chapters with almost every congressman and senator I could find and took them through it very carefully. That’s where I really went at the Tax Policy Center and showed them why their model and results were wrong. I provided them with a theoretical rebuttal and an econometric rebuttal with actual data showing that historically, when policies like the TCJA were passed, the economy grew much faster and tax revenues rose.

There were a couple of other things I did at the same time. If you change taxes, there should be two effects. Let’s say you raise tax rates. You would expect to collect more revenue per dollar of tax base, and you would expect to see a smaller tax base. These two effects always work in the opposite direction. Raising the rate, you collect more revenue per dollar of tax base, but because you make it less profitable, you’ll have a smaller tax base.

I took the U.S. economy and looked at the relationship between real tax revenues and economic growth per se. If the economy grows faster, you’d expect the tax rates to be lower. If it grows slower, you’d expect the tax rates to be higher. I looked at the whole history of the U.S. economy and found that the only thing that determined tax revenues in the U.S. was economic growth. Now, that’s within the framework of where tax rates were. Obviously, at zero tax rates, you’ll grow faster but you’ll get no revenues. But within the range of where we actually operate as a U.S. economy, there was a strict relationship, that the single factor explaining tax revenue growth was real GDP growth. In other words, tax rates did not change the tax revenues.

The reason why they didn’t is pretty obvious. If you raise taxes, people will shelter income more. They’ll move it offshore. There are all sorts of ways of getting around it.

The paper was published by the Committee to Unleash Prosperity, which got it all — every congressman, every senator, all the businessmen. That’s how it got to be distributed in the White House as well. This is the model I used to help develop the TCJA. As you know, Larry Kudlow gave me full credit for having authored that bill.


Dr. Laffer’s Persuasion Tactic to Win Over Congressmen

Dr. Laffer: What I did with [the model] was not talkie-talk over green tea with a congressman, a senator or the staff. Anyone can talk. I took them down to the data, the econometric model, and showed them how it worked.

The way I pushed and the way I did my offensive and defensive tactics was through an econometric model and through looking at history. I took them back to the Reagan period and the Kennedy period, and I said, “What happened to tax revenues when John F. Kennedy cut the highest income tax rate from 91% to 70%, and the lowest tax rate from 20% to 14%? What happened to tax revenues? What happened to the economy? What happened to the budget?” The economy grew much, much faster. It was called the Go-Go ‘60s. Tax revenues, especially from the rich, went way up, and the budget went into surplus.

The same thing happened under Reagan. We cut the highest income tax rate from 70% to 28%. We cut the corporate rate from 46% to 34%. We cut the capital gains tax. What happened? We had the Reagan period, the Reagan ‘80s. You had the revenues coming in, and revenues, from especially the rich, went way up. This is the type of logic and the way I went through it with these people, slowly — not yelling, not screaming, just showing them the numbers and explaining to them what happens.

I also took them all through very carefully that when tax rates go up, rich people hire lawyers. They hire accountants and deferred income specialists. They hire lobbyists to be able to find ways of sheltering their income. When you raise tax rates on the rich, the rich do get hurt. But what they do earn, they then shelter. The revenues go way down because their incomes go down and they shelter what incomes they do have. I went through it carefully, trying to explain why taking it from 39.7% to 37% would make a huge difference on improving revenues because [the rich] would no longer shelter their income and they would earn more income. They’d shelter less and earn more, which means that even though the rate is somewhat lower, the effective rate will be higher.

No one in politics that I know is very ideologically centered. They are not specialists on economics. They’re not technically-oriented people, so they handle issues like this very differently than we do. They don’t think them about them ideologically. They don’t think about them in principles. When you cut taxes, people invest in new infrastructure, productivity goes up and wage increases. None of them have a belief in the virtuous economic cycle of capitalism.

But they can be convinced if you talk to them.

I spent probably two hours with Bob Corker, the Tennessee senator from Chattanooga. Corker was very skeptical, but I spent two, two and a half hours with him on the floor of his office with my computer printouts. “What about this? What about that?” I went through the math and the statistics with him. At the end of the discussion, he said, “Okay, Dr. Laffer. I’m convinced. I will vote for the bill.” He was the final vote that caused us to win the vote.

――Cho: So he was convinced by you.

Dr. Laffer: He was convinced by the evidence, which is what a good senator will do. Each separate episode of a tax increase, decrease or government spending is a new story for them. Each time, you have to go through and explain it over and over and over again. That’s what I do, and that’s what I did as a professor. That’s what I had to do for Proposition 13. (For more details, see “Part 4: His Prediction Came True! Laffer Leads Tax Cut Movement to Victory.”) That’s what I did with the Kennedy tax cuts. That’s what I did with the Reagan tax cuts. That’s what I did with the TCJA. Each time, it’s a new set of students you’ve got to convince carefully.

――Cho: It requires enormous perseverance on your side, right?

Dr. Laffer: It requires not getting angry, not saying, “Oh, you dummy. You should understand.” No, they shut the windows on you if you say that.

Our job is to win these people over, not to defeat them. They’re not our enemies. They just don’t know. They don’t have any firm belief in freedom. They don’t have any firm belief in the virtuous cycle of capitalism. They may have studied it once upon a time, but that’s not where they are now.

It’s like talking about these things with your father or brother or sister. You’ve got to go through it slowly and nicely and smile all the time, have a cup of tea while you’re talking and trying to get them to be receptive to listening to logic and looking at evidence.

I first went to Washington, D.C., in 1967 when Lyndon Johnson was still present, so that’s 55 years ago. The reason I’m so successful with presidents, governors and state legislators is that I don’t treat them like dumb people. I sit down and try to explain it to them. I try to explain it to them in terms they understand, and they can see the evidence. If you do that carefully, most of these people will vote honestly. The ones who won’t vote honestly don’t want to listen to you. They don’t want you anywhere near them.

The same goes with debates. I’ve got another book that’s coming out in March. It is the response to the redistributionists, the people wanting to tax the top one percent at much higher rates. I had a debate at UT Austin with James Galbraith, a very liberal professor there. His father was the left-wing professor of all professors, called John Kenneth Galbraith. It was a very refined, gentlemanly, good debate. At the end, he said he agreed with me. He said he thought the best tax bill of all time was the Reagan tax cut. At the end, he walked over from the other side and gave me a big hug. It was amazing to see this debate in front of a huge audience.

Now, you want to see the opposite one? I had a debate at Oxford Political Union in December of 2014 with the most violent, virulent, aggressive debater named Mehdi Hassan. Mehdi Hassan prides himself on using the most offensive debate tactics against anyone, by the way, in any field.

These are two-hour sessions in front of a huge student audience. The student audiences in Oxford, England, are not friendly. Students are all left-wingers. I imagine that’s true in Japan. It’s only the older people, as you learn and have experience, that you became more conservative. That’s true in Britain too. So I was in a very hostile audience with the most hostile host debater in the world. He was like an inquisitory lawyer.

I think you will be extraordinarily proud of your friend here, okay? They use my debate styles as their course material in Oxford as how one should conduct himself or herself in a debate. You want to watch that someday. It will make you very uncomfortable. It’s like looking at someone on trial. But I won the day hands down on that one.

This is what I’ve always tried to do. I never make it personal. I never make it that you’re stupid, dumb or nasty. That you’re antisocial. That you’re in favor of bad people, that you get paid off. You never win an argument that way. You never win when you fight. When you fight, you always lose. You may not lose as much as the guy you beat up, but you always lose. It’s much better convincing someone than it is fighting them.

Behind-the-Scenes Look at Trump’s Historic TCJA (Part 1 of 2)
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