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The brain behind the Brownback tax cuts

Economist Arthur Laffer remains a lightning rod

By Mike Shields | August 14, 2012

The controversial tax cuts signed into law by Gov. Sam Brownback were helped along — or at least were certified a good idea — by economist Arthur Laffer, the 72-year-old namesake of the Laffer Curve, which he supposedly sketched on a napkin to illustrate a theory during a lunch in 1974 with Dick Cheney and Donald Rumsfeld, then aides to President Richard Nixon.

Laffer, at the time a California economics professor, also helped write that state’s property-tax capping Proposition 13, which some, including himself, credit with triggering a national tax revolt that led to the election of President Ronald Reagan, for whom he served as an economic adviser.

Laffer, sometimes called the “father of supply-side economics,” now has a consulting firm that specializes in producing reports and presentations that conclude tax cuts will spark economic growth. The reports generally read more like sales pitches than disinterested scholarly studies and typically are done in league with conservative groups such as the American Legislative Exchange Council (ALEC) or state think tanks that are members of the State Policy Network, a national association that provides what sometimes is described as “franchise” support to its often thinly staffed state affiliates. The Kansas Policy Institute, another supporter of the Brownback tax cuts, is a member of the State Policy Network.

Documents

Dueling Oklahoma Reports

Laffer’s long-established credentials in conservative Republican circles and minor celebrity status have made him an apparent favorite among the nation’s more conservative Republican governors who took office in 2010 with tax-cutting agendas.

Soon after he was elected in 2010, Gov. Rick Scott of Florida named Laffer to his team of economic advisers.

The term "Laffer Curve" was coined in the 1970s by Wall Street Journal writer Jude Wanniski who reportedly witnessed Laffer sketch it on a napkin during a power lunch to illustrate a concept that Laffer attributes to the 14th century Muslim scholar Ibn Khaldun and more recently to John Maynard Keynes. The concept is that there is an ideal level of taxation somewhere between 100 percent and 0 percent that maximizes the return to a government treasury and that a lower ideal rate produces more revenue than a less realistic high rate that encourages tax avoidance or dampens economic productivity.

The term "Laffer Curve" was coined in the 1970s by Wall Street Journal writer Jude Wanniski who reportedly witnessed Laffer sketch it on a napkin during a power lunch to illustrate a concept that Laffer attributes to the 14th century Muslim scholar Ibn Khaldun and more recently to John Maynard Keynes. The concept is that there is an ideal level of taxation somewhere between 100 percent and 0 percent that maximizes the return to a government treasury and that a lower ideal rate produces more revenue than a less realistic high rate that encourages tax avoidance or dampens economic productivity.

And this year, Laffer has been busy with tax-cutting efforts in at least three states: Oklahoma, Tennessee and Kansas.

The dictionary definition is that it is a school of economic thought that emphasizes the importance to a strong economy of policies that remove impediments to supply. In practice, it holds that reducing tax rates for businesses and the wealthy will stimulate savings and investment for the benefit of all. It sometimes is called "trickle-down" economics or, as described in 1982 by economist John Kenneth Gabraith, the "horse-and-sparrow" theory: "If you feed the horse enough oats, some will pass through to the road for the sparrows." Supporters of the theory often point to the economic growth that occurred after the top U.S. income tax rate was reduced from 91 percent to 77 percent under President John F. Kennedy. The current top federal rate is 35 percent.

A conservative think tank in Oklahoma that once employed Kansas Budget Director Steve Anderson as a research analyst hired Laffer to produce a report that supported efforts by Oklahoma Gov. Mary Fallin, a Republican, to phase out the state’s personal income tax.

The Oklahoma Legislature, dominated by Republicans in its upper and lower chambers, ended this year’s session without passing Fallin’s proposal or even a watered-down version. In the course of the debate over the state’s tax policy, Oklahoma’s leading economists roundly criticized the Laffer report.

They said it relied on faulty methods and incorrect arithmetic to exaggerate what the tax cuts might do for economic growth.

“Normally, these errors would be the subject of quiet discourse among economists,” wrote Kent Olson, an emeritus professor of economics at Oklahoma State University in a critique of the report. “In this case, however, their application produces an estimate of the economic growth dividend and associated outcomes that are so greatly exaggerated that policymakers deserve no less than full disclosure.”

In Tennessee earlier this year, Gov. Bill Haslam proposed reducing the state’s estate tax. Laffer, who has a home in Tennessee, was at the front of the movement to repeal the estate tax and produced a report that drew heat from economists for, among other things, claiming that the tax had cost Tennessee 220,000 jobs over the course of 10 years. That despite the fact that the state already had enacted most of a 15-item policy wish list created by Laffer and ALEC, including elimination of the state income tax.

Laffer concluded that Tennessee’s relatively poor economic performance despite the other policy changes favored by conservatives was due solely to the estate tax, a premise that was backed by nothing “even resembling a compelling case,” according to the Institute on Taxation and Economic Policy. “Lawmakers seeking a clear-eyed assessment of the estate tax will have to look elsewhere.”

Laffer told a Tennessee legislative committee that FedEx founder Fred Smith had told him he planned to leave Tennessee if the estate tax weren’t repealed. “And now we don’t want to lose FedEx,” Laffer told the legislators. “Fred Smith’s a couple of classes behind me at Yale and he’s a good friend.”

The next day Smith told the Memphis Commercial Appeal newspaper that Laffer must have misunderstood him because he had no position on the estate tax nor did he have plans to leave the state one way or the other.

As in most states where he has worked, Laffer’s conclusions met some resistance.

“What’s clear is that after all these years of passing tax policy that caters to corporate interests, we still have many problems. How can anyone think that repealing the estate tax — Mr. Laffer said himself that the estate tax affects a ‘narrow sliver’ of people — will change things?” said Mary Mancini, executive director of Tennessee Citizen Action, a Nashville-based consumer rights group. “We’ve tried crafting tax policy that prioritizes large corporations over middle-class and working families and local businesses, and it’s clearly not working.”

But that argument did not prevail. Tennessee lawmakers agreed in May to phase out the estate tax over four years, repeal the state’s gift tax retroactive to Jan. 1, 2012, and reduce the sales tax on food from 5.5 percent to 5.25 percent.

The Brownback administration paid Laffer $75,000 for his help with its tax-cut plan. For that they got some consultations and two meetings with Republican-dominated legislative tax committees, some members of which seemed genuinely awed by his presence. Laffer met his contractual obligation of a third Kansas appearance on Tuesday in Overland Park, where he described the benefits businesses would see from the tax law Brownback signed.

When Laffer first appeared at the Statehouse in January, Sen. Les Donovan, a Wichita Republican who chairs the Senate Taxation Committee, described him as “a special guest who has proven expertise in the fields of economics going back decades. So we’re going to try to plumb his source of knowledge and everything best we can.”

After Laffer spoke and began to take questions, he was challenged first by Sen. Tom Holland, a Baldwin City Democrat who ran against Brownback for governor, and then by Kari Ann Rinker, a single mother who is the Kansas lobbyist for the National Organization for Women.

Holland, among other things, questioned Laffer’s conclusion that the lack of an income tax was the leading factor in economic growth in energy-rich states such as Alaska and Texas.

Rinker questioned the effectiveness of a plan that would cut taxes for richer Kansans but raise them for the poor.

Laffer responded affably to the challenges, seemingly unperturbed by them. But Donovan admonished Holland, essentially warning him, the audience and fellow committee members to lay off tough questions.

“I don’t want any more of those,” Donovan said. “We’ve had this discussion, but that’s the last one I’m going to allow.”

Unlike in Oklahoma and Tennessee, Laffer did not produce a tailored report in support of the governor’s tax plan. That perhaps spared him the detailed critiques from Kansas economists that he met from their counterparts in Oklahoma and elsewhere.

Instead of a Kansas-specific report, he cited a 120-page booklet he had helped prepare for ALEC called “Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index.”

Brownback penned the brief introduction to the booklet, which was published in 2011.

"It has been said that the popularity of the Laffer Curve is due to the fact that you can explain it to a congressman in six minutes and he can talk about it for six months." - Hal Varian, chief economist for Google

“It is true that lowering taxes can be politically difficult: even fiscal conservatives start losing their enthusiasm for cutting taxes when special interest groups that consume a state’s tax dollars warn them that tax cuts will have dire consequences,” the governor wrote. “But the consequences of being caught in a spiral of increased taxes and a decreasing rate of return on the tax base are much more dangerous. Arthur Laffer, Stephen Moore, and Jonathan Williams use a clear, concise format to expose the scare tactics of the tax-and-spend crowd and show how economic vitality follows lower taxes.”

So far, the leading critics of the Brownback tax cuts have been those who represent local public schools, including the teachers’ union and the association of school boards, which fear education funding must suffer when state revenues drop. Schools have long taken the lion’s share of the Kansas budget, and the governor’s political opponents are more likely to characterize them as the state’s dominant interest rather than a special interest.

“Rich States, Poor States,” like other recent Laffer reports, has been criticized by analysts and economists at various think tanks but has found support within the conservative Republican movement.

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