The Liberty, October Issue, 2025

The Liberty asked Dr. Laffer about his outlook towards the future state of the U.S. economy.

Interviewer: Hanako Cho

Cho: In what was perhaps the biggest highlight of the year, the One Big Beautiful Bill (OBBB) was signed into law. The Tax Cuts and Jobs Act (TCJA) which you helped draft and was signed into law by President Trump in December 2017 has now finally been made permanent.

Dr. Laffer: That’s right. During the first term, we passed the Tax Cuts and Jobs Act and a large portion of that bill was not made permanent because of the accounting procedures and the rules of the House and the Senate. It was a bill that would expire at the end of 2025, and the bill would reset back to where it was before the bill passed.

One of the examples is that the highest income tax rate was 39.6% before the bill passed. That was lowered to 37% in December 2017. On January 1, 2026, it would’ve popped back up to 39.6% if not for the OBBB.

Now, there were a lot of procedures like that as well. A couple of the provisions of the bill were permanent. They would go on forever. One of those was the corporate tax rate which has dropped from 34% down to 21%. But if you look at it, the death tax would have gone back up which would have been a huge increase in inheritance taxes, an enormous increase in taxes on estates. Also, the depreciation schedules would have changed dramatically to 30-year depreciation schedules rather than 100% write-offs which would discourage business investment.

If the bill had not passed, there would have been a very major tax increase in the U.S. from where we are now. That would have had very significant deleterious impact on the economy.

The way I look at it, most, if not all of the tax rate reductions that were included in 2017 are now made permanent and we prevented serious damage from a tax increase. If this bill had not passed, I have no idea what would have happened to the U.S. economy, to the U.S. political system.

I’m very sorry that there was no bipartisanship in this at all. Not one Democrat voted for the bill. This would have been a very important time for a show of bipartisan support, but that’s not what’s there.

Tax Exemption on Tips and Overtime Creates More Work Incentive

Cho: One of the main themes of the OBBB includes tax exemption on tips and overtime pay. What do you think about this?

Dr. Laffer: From the standpoint of economic logic, you always want to have the lowest marginal tax rate to increase output, employment and production. So this is just a really, really good idea.

I mean, the “no tax on tips” is just a practical thing. Why would you spend a billion dollars to try to collect $100 million? It is so hard to enforce the tax on tips. You have to audit people in the restaurants. It makes no sense, and it adds a great deal of anxiety, uncertainty, unpleasantness. It’s not because they’re bad people, but they’re not going to report those tips on their tax. Are you going to make them criminals, or are you going to make the law fit them? I love it that they made the law fit them. As long as people aren’t going to obey the law, don’t have the law, alright? That’s the way I see it there.

Overtime pay – I really like that. As it stands now before this bill, overtime is taxed at your highest marginal tax rate which means it’s really disadvantageous for people to work overtime. Now, the reason people work overtime is because they’re really needed. Let’s say it’s a policeman or a firefighter who has a fire. He’s got to work more than 40 hours. These are high importance jobs. Most people work overtime because there’s something very important to be done that needs their extra hours. Therefore, they should be incentivized as much as possible to do that work, to be able to get the high-priority work done. So I love it that they got rid of taxes on overtime.

Now, it does set into motion a very difficult enforcement procedure. What is overtime? What isn’t overtime? Let’s imagine that I claim that I work 80 hours a week at my office. Do I get to deduct 40 hours of it as my income tax? No, it’s got to be specified in people who work hourly and all sorts of things. It has a lot of bureaucratic detail that makes it less attractive but it’s a really, really good idea.

There’s also a tax reduction on seniors on their Social Security benefits.

That was all in the new bill that went through on taxes. Most of those are good.

Cho: The U.S. Congressional Budget Office (CBO) estimated that the One Big, Beautiful Bill will largely increase the U.S. federal deficit over the next 10 years and stirred a public debate.

Dr. Laffer: All of the CBO forecasts are bogus, as they have always been. The CBO announced a static analysis, and later presented dynamic scoring. We all know that dynamic scoring is better than static analysis, but it is wrong that we will be in a big deficit and the House has misused static scoring.

The issue stemmed from the pay-as-you-go rule known as PAYGO. Under PAYGO, Congress must pay for the cost of any legislation that increases spending by reducing other spending or increasing other revenues via raising taxes. For every dollar you spend, you have to raise taxes by $1 or reduce spending by $1. It’s all static. I would like to see them change the rules in the House and the Senate rather than trying to guess what good dynamic forecasting would be.

My guess is that we’re entering a nice growth stage which should last for a while. In spite of Powell’s lack of knowledge, I don’t see higher inflation anytime soon. Yes, there’s never going to be a time that we can sit back and go, “Phew”; that’s not going to happen with this presidency. My guess is that the smoke will never clear, the dust will never settle and the bone-jolting ride in the wagon down the rocky road from where we were will never end. However, 20 years from now, this era will be viewed as the beginning of a new American Renaissance. I’m about as optimistic as I can be.

Don’t Create Problems by Paying People Who Don’t Work

Cho: President Obama said that about 16 million Americans are at the risk of losing their Medicaid. Do you think that’s true?

Dr. Laffer: No, I don’t think that’s true.

I do think it’s true that the health system needs major reformulation. What really needs to be done is that market forces need to be brought back into the healthcare system in the U.S. Hospitals and other healthcare providers need to post prices as to what transaction prices are so that people can make good choices of whether they need this or don’t need this. Doctors can also make good choices like that. I think it’s also very important that they tell you what the consequences are. We need medical transparency.

Medicare and Medicaid and all that stuff are dealing with an old system that’s not a good system. If we put through medical transparency, all of these other questions would just disappear like that.

Cho: Do you think the 80 hour/month work requirement to receive Medicaid will work?

Dr. Laffer: I think that’s wonderful. If you can work, shouldn’t you work? Work requirements are very difficult to put in correctly at the high level. Each person is different, but putting in a general concept of work requirement is good, I think. I think we should have a reformation of the welfare system including Medicare, Medicaid. That’s a good step in the direction there on work requirement.

Cho: It’s really amazing to see one out of five people are now on Medicaid in America.

Dr. Laffer: Those are just scary numbers. What you’ve done with Medicaid, Medicare and all of these things as welfare payments is you’ve created the very problem that you’re trying to solve. If you pay people who are sick, if you pay people who don’t work, if you pay people who retire early, if you pay people not to work, and tax people if they do work, do not be surprised to find a lot of people not working.

Which would you prefer? Paying people more who don’t work, or taxing people less who do work? Obviously, you’d prefer to tax people less who do work. That’s our North Star.

Paying people more who don’t work is not a good model for economic growth and prosperity. You’re going to create the very problems you’re trying to solve. That’s why this new bill moves us in the right direction.

Now, does it do it all correctly? Are there problems in the bill? You better believe it. But I’m very pleased that the One Big, Beautiful Bill passed. I think it’s the opening up of the gates of a new era of prosperity for the U.S.

Now, there’s a lot of nice legislation that Trump could pass in the next three-and-a-half years. But the big chunk of legislation is done and that’s the One Big, Beautiful Bill. That’s funded the border. That’s funded the Defense Department. That’s funded all of these other agencies and the stuff in his agenda for the future. That’s all in the OBBB. Whatever else we need in legislation is nothing nearly as large as what we needed in this.

How Can Trump Do Better Than Reagan?

Cho: Do you have any ideas to make the One Big Beautiful Bill into an even better legislation?

Dr. Laffer: If he can bring down corporate tax from 21% to 15% that would be terrific. It’s unfortunate that the flat tax was not part of the bill. What I’d also like to see is the elimination or the great reduction in the tax deductions for 501(c)(3) organizations other than religious organizations. Religious organizations have a special place in the Constitution and I just don’t want to go against the churches, the synagogues, the temples and all of this stuff. I don’t want to be the person who’s anti-God just for the record. So just look at the 501(c)(3)s. Reagan got the income tax rate down to 28%. I am continuously prodding the administration, including Trump himself, “You can do better than Reagan, can’t you?” He always asked me about Reagan and so he should. I’m the only one left who remembers Reagan personally and all of that. He has a way of doing that.

A Good Policy Mix Will Create Higher Economic Growth

Cho: Please tell me about your outlook on the future state of America’s economy.

Dr. Laffer: I could see the participation rate in the U.S. economy rising quite sharply back up to maybe Clinton levels of 67% or 68%. That’s employment divided by adult population. I could see average labor hours increase, real wages increase. I could see good investment in the U.S. economy.

If we get Kevin Warsh at the Fed and they do good monetary policy, no inflation, we get fair work, work requirements, we get new spending legislation, we get medical transparency… if all of this started happening, we could really accelerate U.S. growth quite substantially.

As you and I have talked about a lot, I think Donald Trump really wants freer trade – not more restrictionist trade.

If all of that happens, if the tax kingdom is in the right direction, if spending is in the right direction, if monetary policy and regulatory policy are in the right direction, if energy policy is in the right direction, if trade policy is in the right direction, I think you could see growth rates of at least 3% or even growth rates of 4% or 5%. Maybe even a little bit higher. I am really optimistic about the U.S. economy and what’s going to happen.

Dr. Laffer’s Advice to Japan: ‘I want the Samurai back’

Cho: What are your thoughts on Japanese Prime Minister Ishiba’s attitude toward President Trump with regards to trade?

Dr. Laffer: It doesn’t sound very good to me. He doesn’t want to lower the consumption tax. Japan subsidizes all their farmers. It’s a very paternalistic, protectionist country.

After the war during that growth period of Japan, the U.S. encouraged Japan as best we could to be a growth country. We allowed you to use tariffs, quotas, non-tariff barriers to protect some domestic industries. Japan got all this investment from the rest of the world, and they had the most educated workers in the world. As the capital came in with this wonderful labor force and the productivity was great, you dropped tax rates every single year. The U.S. permitted that because Japan was so destitute after the war. Japan’s growth rate was astoundingly high. Just amazing. You grew like no one else grew in the world up until 1989, and then all of a sudden, it stopped. You became a socialist nation then. Japan started paying people who don’t work and taxing people who do work. Once you’ve grown so much as you did, then no longer do you need all that protection for your domestic industries. It’s not right to have it. It hurts your country, it hurts our country.

As you know, I’m a huge fan of the Japanese economy. Japan should be the sort of shooting star, the symbol of economic growth and prosperity. You’re the country that is the example of what it means to be a highly productive, clean, good, sweet, fair society. The reason Japan became such a great nation up until 1989 was because you cut taxes, had economic growth, and lowered prices. Then you stopped and did the wrong thing. Look what happened?

Japan needs to take a deep breath and stop protecting itself— lower tax rates, stop paying people not to work and instead become a productive, great country that it has the potential of being. I rewatched The Last Samurai with Tom Cruise again. I want the Samurai back. You know what I’m saying? I see in Japan just wonderful outcomes that could be if only you would let Japan be Japan.