The Liberty asked Dr. Arthur B. Laffer for the reasons behind the miraculous prosperity achieved under President Donald J. Trump during his first presidential term.

（This interview was conducted on October 30th.）

Interviewer: Hanako Cho

 

Cho: You were one of the key members of Mr. Trump’s Tax Cuts and Jobs Act (TCJA). One important pillar of his act was corporate tax cuts. Could you once again share the characteristics of the TCJA?

Dr. Laffer: The Tax Cuts and Jobs Act of 2017 had four major provisions that I think are really important. The first and foremost is that the highest marginal income tax rate on corporate income was dropped from 35% to 21%. Now, that is a very large drop. At 35% rate, the U.S. had the highest corporate tax rate in the Organization for Economic Cooperation and Development (OECD).

Prior to the TCJA, the U.S. corporate tax rate had been relatively increasing over the years.

The U.S. had the highest corporate tax rate under Reagan at 50% and we cut it to 35% under the 1986 Tax Act. At 50% we were the highest in the OECD. Then there was a revolution in the world and all the other countries in the world dropped their corporate tax rate. But by the time Trump got into office, we once again had the highest corporate tax rate at 35%, and he dropped it to 21%.

The impact of corporate tax cuts is significant. This is because corporations are arguably much more sensitive and elastic to tax rate reduction than the normal everyday average person. They’ve got all of the resources, employees, accountants and lawyers looking all over the world as to how to arbitrage it, in not only sheltering the income but also sensitive in moving income around and responding to it. Global competition is really serious.

Secondly, Trump also cut the personal income tax rate from 39.6% to 37%. Now, if you look at the highest personal income tax rate, Ronald Reagan cut it from 70% to 28% in the 1980s. It was then raised back up, ultimately, to 39.6%, and then Trump cut it down to 37%. So [the individual income tax rate under the Trump administration] was still above where it was under Reagan. But the key is not how low [the tax rate] was cut. It’s how high it was when Reagan came into office.

Thirdly, he put in 100% immediate expensing of capital purchases. Now, the reason that is so important is that when you have inflation, the depreciation schedules take on an exaggerated importance because you only get to depreciate at the cost of equipment. If you buy a machine for $100, you only get to depreciate $100 over a schedule. If there’s inflation, the less it really replaces the cost because the cost of the machine goes up. Effectively, by slowing down depreciation, you get what’s called bracket creep and it undermines the depreciation schedule. The 100% expensing of capital purchases is a really big deal.

So you had the corporate tax rate reduction. You had the personal income tax rate reduction. You had the 100% expensing of capital purchases. All three of those were really important and what we consider in the mainstream discussions of policy.

There was a fourth one which is also very important that people overlook. Donald Trump cut the inheritance tax, the death tax, quite substantially.

In my mind, the death tax is about the single most disgusting tax you can ever have. You can work, you can earn your income, you can pay your taxes fair and square. It’s your after-tax income. It’s yours. You can take that money and go to Las Vegas, let’s say, and you can gamble, drink, smoke, carouse. As far as the federal government says, “It’s your money,” you do with it as you want.

But if you decide to give it to your children or to other children, they’re going to tax the hell out of you.

That’s the most anti-social, anti-incentive tax I have ever seen. It’s a wealth tax and it’s directed completely.

Cho: With Mr. Trump’s TCJA, there was economic growth.

Dr. Laffer: Economic growth in the U.S. increased dramatically, and two years after the tax cuts took effect in the fourth quarter of 2017, U.S. real GDP was 2.5% higher than it would have been had we grown at the European growth rates. In the two years prior to that, the U.S. real GDP grew a little bit less than Europe did so there was a marked increase in growth.

There was also a marked increase in median real wages. Overall, the period was set at $68,700 in median real wages which was much more than anything in the last 30 years. It was quite an impressive growth, whether it be in wages or real GDP.

Black unemployment rates were at an all-time low. Hispanic unemployment rates were at an all-time low. Unemployment rates for the less educated groups in our society were at all-time lows. All of these wonderful things occurred.

In addition to all of that, federal government tax revenues in the two years from the fourth quarter of 2017 through the third quarter of 2019 were up a lot.

In fact, they were up by more in those two years relative to the four years prior. The growth in revenues usually increases over time, but not only did it increase this time, they increased by more than they had before.

This is the sort of thing we come to as the basis, what you call “the premise.” It’s really important we have those facts in line because those are the facts. It’s not someone’s opinion. You can look at the national income and product accounts of the U.S. government and see those facts.

Left-wing economists, or redistributionists, think that it’s the role of the government to redistribute income.

Even if they were right that it’s the role of the government to redistribute income, we redistributed income with the TCJA and made the poor a lot better off. We achieved the goals that they want to achieve but not in the way they wanted to achieve it. They want to achieve it by raising taxes on the rich and by giving the money to the poor. We like to achieve the prosperity for the poor by creating economic growth, by increasing the number of jobs and by increasing real wages. And the facts prove that our method made people better off.

 

Redistributionists Dislike Corporations

Cho: Why do the redistributionists want to raise the corporate tax? Do they overlook the negative effect of the corporate tax increase?

Dr. Laffer: No, I think they don’t like corporations. They don’t like the rich. I like the rich and the poor.

My dream is to make the poor richer, and my dream is also to make the rich richer. I want to make everyone better off, and I personally don’t have any antagonisms towards rich people. I think rich people are rich most likely because they did something good that made them a lot of money. Now, there are some rich people who steal. That’s true. But there are some poor people who steal. Every class of people has its unpleasant members.

I like to see everyone getting rich. I think that wealth and higher income leads to better behavior on a world level. I think rich people are less likely to get into wars than poor people. I think rich people are more likely to give generously to other people and to causes than poor people.

The dream should not be to achieve income equality through making everyone equally poor. The dream should be to make everyone richer, not poorer. That’s my view of the world.

 

Workers Burden 70% of Corporate Taxes

Cho: There’s an idea that’s deeply rooted in our society, that is, an increase in corporate taxes increase the burden on capitalists.

Dr. Laffer: When you tax corporations, there are three groups that pay the tax: the capitalists who own the company, the workers and the customers.

They have the customers pay part of the corporate tax through higher prices, the workers pay it with lower wages and the capitalists or the shareholders who own the company pay it by lower returns on their investments.

The share of corporate taxes paid by the workers is 70%. That’s the burden. If I add taxes of $1 to a corporation, $0.70 would go to workers getting less wages. The workers take on a large burden.

This isn’t a new invention among economists; it’s an old-timey way.

 

The Impact of Corporate Tax Cuts from a Dynamic Scoring Model

Dr. Laffer: Now, is the opposite true? In other words, if you reduce corporate taxes, do we reduce their burden and lower tax revenue as a result? No, because that is a very static view of the world.

Cho: So you’re saying that a different world will appear under a dynamic scoring model?

Dr. Laffer: It’s not a zero-sum gain.

The left think that when you lower taxes, their tax burden will reduce and tax revenues will go down. But after the TCJA, total output went up because of the incentive effects of the tax rate reductions. Corporate profits went up but the share going to consumers also went up because there was no inflation, worker wages went up and tax revenues ultimately went up.

Some economists don’t understand that tax rate reductions have supply-side responses.

Cho: It’s the Laffer curve effect.

Dr. Laffer: It’s the Laffer curve effect. I used it all the time back in the ‘70s and ‘80s and I was pretty much alone back then.

And I didn’t invent the Laffer curve, Hanako. The history of the Laffer curve is ancient and it goes back thousands of years.

In certain periods of time like in the ‘20s, it was the common and prevalent thought. If you look at Andrew Mellon, former U.S. Secretary of the Treasury who led large-scale tax cuts, he talked about it nonstop.

The whole presidential election of 1920 was the Laffer curve. Warren Harding, the Republican nominee, won the 1920 election and cut the tax rate from 73% down to 25%, ultimately. Then we had the Roaring Twenties.

Not only was there no inflation, but prices throughout the Roaring Twenties actually fell. We had a huge increase in real wages, we had a huge reduction in poverty, despair and unemployment, especially among the poor.

 

11 Consecutive Years of Federal Budget Surpluses

Dr. Laffer: We also had budget surpluses in the federal government after tax cuts were implemented. In the Roaring Twenties, we had 11 consecutive years of federal budget surpluses.

It was all the same thing that had happened with Trump’s TCJA and under John F. Kennedy’s tax cuts. When President Kennedy cut the highest individual income tax rate from 91% to 70% and the lowest individual income tax from 20% to 14%, as well as cutting the corporate tax rate from 52% to 48%, the budget went into surplus.

We had the “Go-Go ‘60s.” We had the stock market boom and a federal budget surplus. When you cut taxes, everything worked exactly the same in a positive way and the benefits of tax rate reductions on corporate taxes benefit all the groups.

Cho: What would happen if Kamala Harris raised the rate to 28%? And if Trump got elected, what would happen to the U.S. economy if he cut the corporate tax rate from 21% to 15%?

Dr. Laffer: Night and day, history would repeat itself. If she got elected and she was successful in raising the rate to 28%, that would put us as the highest corporate tax rate in the OECD. Once again, that would have the effect of slowing growth. It would have the effect of making the poor poorer. It would have the effect of reducing the median wage of the workers in the system. It would have the effect of causing the deficit to increase in the U.S.

The poor, the minorities and the disenfranchised would suffer more than they would if she did not raise that tax.

The opposite would happen if Trump were to lower the rate from 21% to 15%, if he is elected and if he can get it passed. If he did all that, it would have the same effect as the TCJA. It would cause growth in the U.S. to increase. It would cause the budget deficit to shrink. It would cause prosperity to come to the poor, to the minorities, to the disenfranchised.

Now, just for the record, it would lower us to be in the middle of the pack of countries with corporate taxes. This has a large impact, since as I said in the beginning, corporations have all of the resource, they’ve got all of their employees, their accountants and their lawyers, and all of that looking all over the world as to how to arbitrage it. They’re much more elastic to a tax rate reduction. Their responses to a tax cut are much greater than, let’s say, the normal everyday average person. That goes in both up directions and down directions.

Now, that is equally true to the highest individual income tax rate.

Rich people who are taxed the highest rate are much more sensitive to taxes. They pay more at a higher rate. They also have more money which means they can hire lawyers and accountants and all of this stuff. That’s why we look at the highest tax rates so carefully, because that’s where people really do the responses. That’s where economics plays the role so keenly in there.

Cho: The Pillar Two global minimum tax, a 15% minimum tax on global corporate profits to prevent tax evasions by Big Tech and other large companies, has been agreed upon and enforced in 140 OECD countries. The Biden administration seeks to increase taxation and is said to have contributed to the policy.

Dr. Laffer: I saw Janet Yellen (Secretary of Treasury at the time) and Joe Biden (U.S. President at the time) talking about a global minimum tax of 15% and it’s the wrong way to go.

If you want to have someone do something, it’s much nicer, effective, better and much more humane to reward them for doing something good than to punish them for doing something bad.

There is nothing wrong with a company making high-quality products at low cost and earning profits. That is not an evil, awful thing to do.

In fact, it is exactly what we want companies to do. We want them to produce high-quality products at low cost so people can benefit from the productivity of these companies.

Therefore, when you want to have a 15% minimum tax, you are trying to punish large global companies that are trying to do a good job. You are trying to tax corporations from doing what they do best, which is to produce goods. To go in there to punish them is anti-social, hypocritical, disingenuous policies.

You should never use taxes to get people to stop doing good things. There’s nothing wrong with corporations trying to make higher profits because they make higher profits by producing more goods, more services. Governments are just showing extreme jealousy and vitriol and bitterness trying to tax corporations from doing something good and producing high quality products. That’s why I’m very much against a global minimum tax.

I’m very much in favor of tax rate reductions. We all know that we need to get government tax revenues. But you want to collect your tax revenues in the least damaging fashion and spend the money in the most productive fashion.

But the government is trying to tax those who are the most productive and who are more sensitive to taxes. That’s just plain wrong.

That’s what your magazine and I have been fighting to stop. That’s what is called supply-side economics.

We have a group of intellectual elites who are protecting their own positions, but it’s very hard to win because they have access to all sorts of misinformation. If we could focus just on facts, we would win every day all the time.

 

Japan and the United States Are Friendly Competitors That Can Create Far Greater Prosperity Than Either of Us Alone

Cho: Japan’s corporate tax is one of the highest among the OECD countries. What should the Japanese government do?

Dr. Laffer: As opposed to most Americans, I focused on Japan very heavily and early in my career.

As you know, I was in the White House from 1970 to 1972 as the first chief economist of the Office of Management and Budget (OMB) when it was formed. I was George Schultz’s right-hand person and I was the highest-ranked staff economist in the White House back then.

The Nixon administration back then was very retrograde in economics. They were not good on economics. Nixon raised taxes, put on regulations, wage and price controls, put on tariffs, did all sorts of redistributionist policies.

I was the lone person in the White House arguing for lower tariffs and lower tax rates. I was very young at 29 years old, Hanako, not like the old Yoda that I am today. Back then we were putting on all sorts of tariffs and quotas on Japan and I championed free trade.

I did articles for the Nihon Keizai Shimbun for years as a syndicated columnist. Every December I came over to Japan and did my lectures in Japan in front of huge crowds. I have been involved with Japan for a very, very long time. And like most of my ideas, like most of my thoughts, I have never tried to balance down. I’ve always tried to balance up.

I have never thought of Japan as the enemy. I have always thought of Japan as an ally and as a friend. I have always wanted to make Japan richer and the U.S. richer. I think tariffs, quotas and non-tariff bearers are very detrimental, especially to high-trading countries like Japan.

I think the U.S. imposition of very, very high tax rates after World War II were a mistake. Douglas MacArthur and the government that put in those policies at that time made mistakes and they hurt Japan a lot. I don’t think they did it deliberately but all their protectionist policies were not pro-Japan.

I am very pro-Japan. I’m also really pro-America, just for the record.

I think the relationship betwee Japan and America should be partners, not adversaries, and friendly competitors, not unfriendly competitors. I don’t think Japan’s prosperity takes away from America’s prosperity. I think it adds to American prosperity.

From that background, my love for Japan and my love for America, I’ll speak about Japan’s policies. I want you to understand my perspective.

I think Japan’s economic policies have been very damaging to the Japanese people and have caused Japan’s prosperity to be vanishing, not appearing.

I think they have overspent, overtaxed and have way too much government. I think Japan has put in way too many protectionist policies on trade, be they tariffs, be they quotas, be they non-tariff barriers. You know how difficult it is to get an American product to be sold in Japan.

I say this not because I think Japan is out-competed in the U.S. I think the Japanese government has hurt Japan a lot. When Japan looks in a mirror and looks for the enemy, what they will see in there is what is the enemy to prosperity in Japan – that’s the Japanese government.

Your lack of prosperity is Japan’s problem, it is not an American problem. I do think American tariffs and quotas hurt Japan, but I think your tariffs, your quotas, your restrictions, your high tax rates, both corporate and personal, really hurt Japan. I think your government spending and your transfer payments really hurt Japan. It hurts the chance of Japan.

Do you remember my newspaper column, “Sayonara Japan”? It says the whole story. Japan is its own worst enemy and Japan needs to trust and love the Japanese people. They don’t.

The government of Japan believes it is smarter than the people of Japan. They believe they know what’s good for the Japanese people better than the Japanese people do. As a result, they have hurt the Japanese people incredibly.

Of all the countries in the world, and I’ve seen a lot of countries all over the world, I would say Japan’s government has done one of the worst policies of the global economy for the benefit of its people. It is only because of the incredible resilience and strength of the Japanese people that has kept Japan from being a catastrophe because Japanese policies, I believe, have really hurt Japan. That’s my view of the world.

Forgive me, I try not to talk about other countries’ policies because I am not Japanese. But if you look at my history, from a very young man, I have always been pro-Japan. I’ve always been in favor of Japanese prosperity. I have always argued for policies that benefit Japan because I think those policies also benefit the United States. I think a strong Japan is good for a strong United States. I view us partners in this world, not as enemies, not as competitors. I believe that together, our two countries can create prosperity far greater than either of us alone. I visited Japan for the first time in 1970 and met with all the high government officials as George Schultz’s right-hand person, not because they wanted to talk to a 29-year-old American. But I argued very hard and very strong back then for free trade, for removing tariffs against Japan and for Japan removing tariffs against the U.S.

Japanese imports help Japan. They don’t hurt Japan. U.S. imports from Japan help the U.S. They don’t hurt the U.S. Free trade between Japan and the U.S. is good for both countries.

Low corporate taxes in Japan, and low taxes overall, is good for Japan. A strong Japan is also very good for the U.S.

If you look at the share of the global market capitalization of the Nikkei Stock Average versus the world from 1989 on when Japan implemented the consumption tax, it’s gone way down. In 1989, Japan’s stock market index was about the same as the U.S. It’s not anymore. The U.S. has done a lousy job, but Japan has done a worse job. Personally, I’m saying stop rewarding people who don’t work and taxing people who do work because that will make you a weaker country.

I want to say that all of my life, I have focused on making Japan better, not worse. I have never treated Japan as an enemy. I’ve never treated China as an enemy. I’ve never treated Britain as an enemy. I’ve never treated Russia as an enemy. I’ve never treated Iran as an enemy. I think the world needs to be friendlier, one country with the other. I think the worst thing we can do for world peace is put sanctions on other countries and refuse to trade with them. I think the worst thing we can do for world peace is to try to make other countries poorer, not wealthy.

So I am a very different lot than most of your economists and politicians. To me, we are a family of nations, not a group of enemies fighting over this planet.

I think working together through prosperity, and allowing our citizens freedom, can achieve prosperity far better than can the governments.

Governments naturally hate other governments. Wars are put into place by governments, not by people. You and I don’t fight. It’s our governments that act badly.

I believe that the power of individuals is far greater than the power of governments. And that individuals should run the world, not governments.

I believe our biggest problem is convincing the electorate that these people who are running governments are not doing so in our interest.

The lockdown that came with Covid-19 was horrible. It is the most extreme example of bad government I’ve ever seen. The government doesn’t have to tell third graders, young kids in school who are not in a high-risk category, that they need to wear masks in their classroom. The government should not tell me how to run my life or your life. Get those barriers out of the way and let us deal with each other.

 

Income Transfers: A Stimulus That Worsens the Economy

Dr. Laffer: Governments conduct income transfers. You know my transfer theorem.

The transfer theorem is so important to realize that when the government does spend, it causes output to decline. It makes people soft, not better. When you look at government spending, it doesn’t stimulate the economy, but rather, it de-stimulates the economy because everyone who gets the money is stimulated, but everyone from whom you take the money is de-stimulated. Then you cause bad incentives in the economy.

It’s been 54 years since I got involved with Japan. I’ve always been a huge fan of Japan and I’ve been a huge ally of Japan. I think Japan’s government is following the wrong path. I think they should cut taxes, cut spending, cut those disincentives, get those regulations out of there. Government is not the answer. Government is in many ways the problem. Those are my honest views of what’s happening in Japan as coming from a person who has loved Japan for many, many years.

When you get someone like former Prime Minister Obuchi, Reagan, Kennedy, Bill Clinton or Trump, you get that breath of freedom there. Let’s hope we have a good one coming up in Japan. Let’s hope we have a good one in the U.S.

If I can be of any help in this next four-year period, if by chance Trump wins, if by chance, Republicans take the Senate, if by chance, the Republicans keep the House and if by chance, I would be asked to be involved in politics, you can count on me working for what is best for Japan and America. You can count on the inner circles and everywhere all the time.

That’s also true, by the way, for China, for Russia, for Europe. I’m here to make the world a better place, not a worse place. I’m here to help the poor, not hurt the rich. I’m here to make America great again, but not to make other countries poor again. I want every country to be great again. And I think a great Japan makes America a great country. That’s my story and I’m sticking to it.