The Economist – Arthur Laffer

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Arthur Laffer Review
Arthur Laffer is regarded as the father of Supply-side Economics. Laffer was born in Youngstown, Ohio in 1940 and graduated in the year 1962 with a B.A in Economics from Yale University. Later, he took his masters studies and subsequently his Ph.D. at Standford University where he graduated with M.B.A and Ph.D. in the year 1965 and 1971 respectively. Arthur came to prominence during the two terms of President Ronald Regan where he served as a member of the Economic Policy Advisory Board. Laffer was also Prime Minister Thatcher’s advisor on the UK’s fiscal policy. Currently, Arthur serves as chairman of his economic consultancy, Laffer Associates which is Tennessee-based and also sits on the ALEC Board of Scholars.
Achievements
Laffer had a significant influence on the US economy in the 1980s after having been the leading player in Reagan’s economic policy decisions as seen by the trust Reagan had bestowed on him. He served in Reagan’s Advisory Board for the two terms of his presidency i.e. from 1981 to 1989. Arthur was also in Reagan’s Finance Committee as an executive committee member and also served on Regan’s advisory committee for the 1980 presidential race in an administrative role.
Arthur has been widely recognized in the US for his economic achievements and for shaping the modern economic views. To start with, he was listed in the Wall Street Journal in 1989 as one of the greatest people who influenced the Country’s daily business.

Laffer also appeared in the 1999 Time Magazine Cover in a cover story that regarded him as one of the “century’s greatest minds.” The magazine deemed his Laffer curve invention as one of the things that powered the extraordinary century. Laffer’s creation of the Laffer curve was also regarded as a remarkable event in history by the Institutional Investor magazine. This was in the magazine’s 1992 issue “The Villains, Heroes, Failures and Triumphs, and other memorable events.” Laffer was also listed in the Los Angeles Times in 1990 as one of those who ‘shaped the 80s’.
Arthur Laffer has written many books and journal articles including “Supply Side Economics: Financial Decision-Making for the 80s”, Return to Prosperity and “the End of Prosperity: How Higher Taxes Will Doom the Economy.” Other journals include Reinstatement of the Dollar: the Blueprint” “Monetary Policy and the Balance of Payments” as well as “The number of firms and Competition” which was co-authored with Eugene Fama.
Laffer has received many awards. These include Daniel Webster Award for his public speaking efforts, the Distinguished Service Award, the Adam Smith Awards due to his contributions and insights to the Wealth of Nations. Others include Father of the Year Award in 1983, and the Graham and Dodd Award.
Supply Side Economics and the Laffer curve
Supply-side Economics is a theory that is of the view that economic growth is possible through the implementation of fiscal and tax policies that motivates the people to produce more goods and services. Arthur Laffer was a powerful preacher of tax cuts as a means of getting more revenue and sparking economic growth. He was instrumental in the tax cuts of the 80s during Regan’s administration. Arthur is famed for having invented the Laffer curve that defined the connection between the rates of taxation and resulting government revenue. The curve is said to have been created in a meeting with Ronald Rumsfeld and Dick Cheney in 1974. Though he noted that he was not the initiator of the concept as it came from John Maynard Keynes and Ibn Khaldun, he is celebrated for the implementation and propagation of the idea. The curve shows that at the extreme tax rates of one hundred and zero percent, no revenue would be realized. However, between the two extremes, there exists an optimum tax rate (Fink, 173). Laffer was therefore of the view that having too high tax rates would demotivate the rich and also make them fail to pay. If the tax rates were also too low, the government would raise insignificant revenue that would lead to deterioration of the economy. Though there is no particular shape for the curve, it is denoted as below
The Laffer curve

Laffer explained the curve concerning two effects of taxation: the economic and arithmetic effect. The arithmetic effect holds that the revenue raised is given by multiplying the tax rate with the tax base. This means that R= t x B. Where, B is the taxable base and t the tax rate. At 0% rate, it is assumed that no revenue would be raised. The economic effect on the other holds that the tax rate would affect the tax base. At 100%, the government collects no revenue because the taxpayers either find a way to evade taxation or lose their motivation to work.
Reaction
Arthur Laffer’s concept has received an equal measure of commendation and criticism. Some economists have praised it for the solving of revenue problems citing various situations and countries in which it was adopted. Critics have also outlined some cases and years it was utilized and the resulting decline in revenue realized. For example, its adoption in 1985 during Regan’s administration resulted in reduced revenue. However, adoption of the same concept during the Kennedy administration, where there was a tax cut from 91% to 70%, resulted in increased revenue as there was increased work effort in the top income bracket (Perloff, 140).
Critics have argued that revenue will not necessarily be zero at 100% taxation as some individuals work for charity. Some people enjoy their job and will therefore not be demotivated by the tax increases. They argue that the curve only applies if rises in taxation are accompanied by personal decisions to try to avoid paying taxes. When taxes are considered impersonal, the curve may not work (Levačić, 205). Other critics have argued that the curve is too simplistic for assuming a single labor supply as well as the tax rate. In reality, they argue most systems of taxation are quite complicated in all countries. Others have criticized his lack of a particular shape for the curve.
However, the evidence seems to suggest that Laffer’s idea is valid and should be adopted in most economies. David Ranson, who is the head of research at Wainwright & Co. Inc is of the view that raising taxes encourages taxpayers to hide, underreport, and shift taxes. Higher taxes also makes individuals less keen on production, saving and investment. The primary focus should, therefore, be on the increase of a country’s GDP (Ranson). When capital gains rise, it is undisputable that investors would slow down their realization of benefits. This situation would mean that despite a higher tax rate, the actual revenue collected by the government from capital gains would either remain stagnant or reduce for that particular year (Ireland, 560). The vice versa would also be true. An increase in taxes may not, therefore, lead to higher revenue. The concept is therefore widely regarded across many countries and takes part in many campaigns. Donald Trump was one of the latest proponents of the idea as he promised to implement tax cuts for the rich to spark development.
References
Fink, Richard H. Supply-Side Economics: A Critical Appraisal. 1st ed. Frederick, Md.: University Publications of America, 1982. Print.
Ireland, Peter N. “Supply-Side Economics And Endogenous Growth”. Journal of Monetary Economics 33.3 (1994): 559-571. Web.
Levačić, Rosalind. Supply Side Economics. 1st ed. Oxford: Heinemann Educational, 1988. Print.
Perloff, Jeffrey M. Microeconomics. 1st ed. Boston: Addison-Wesley, 2001. Print.
Ranson, David. “You Can’t Soak The Rich”. Wall Street Journal 2008: n. pag. Print.