Economists Debate If Tax Cuts Pay For Themselves
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President Trump's administration is pushing a business tax cut. And to promote that tax cut without corresponding cuts in government spending, the administration is pushing an old idea - that tax cuts finance themselves. Ailsa Chang from NPR's Planet Money podcast found where that notion comes from.
AILSA CHANG, BYLINE: The story starts with a napkin. That's where economist Arthur Laffer first sketched the so-called Laffer curve more than 40 years ago.
Can I call you Art?
ARTHUR LAFFER: Oh, yes you may but not poop head. Please don't call me poop head.
Seventy-six years old and 12 grandchildren later, Laffer and his curve are back in the limelight.
LAFFER: I've been to this barbeque many, many times in many, many countries.
CHANG: This time, it's the Trump White House resuscitating his theory. And here's what the Laffer curve says, that cutting taxes may encourage businesses to invest more, hire more people. And all those new workers will pay taxes. That will mean more money for the government, so the original tax cuts end up paying for themselves.
Has there ever been any evidence in history in the United States where a tax cut has actually paid for itself?
LAFFER: Oh, tons of them.
CHANG: Which examples?
LAFFER: Whether you go back to Harding and Coolidge, or whether you look at Kennedy, or whether you look at Reagan.
CHANG: Let's take the first two. It's true, there were deep tax cuts in the 1920s and 1960s followed by economic booms, but no one can definitively prove the tax cuts were what caused those booms. As for Reagan, many economists say that's actually a great example of where Laffer was wrong.
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RONALD REAGAN: Join me in this dramatic but responsible plan to reduce the enormous burden of federal taxation on you and your family.
CHANG: When Ronald Reagan took office, the top tax rate was 70 percent. He got Congress to slash it to 50 in 1981. Laffer was one of Reagan's advisers, and he was in the camp saying the steep tax cuts would pay for themselves. Others in the White House were not buying that.
DAVID STOCKMAN: I never believed that. And there was always a split within the church - the supply-side church, so to speak.
CHANG: That's David Stockman, Reagan's budget director. Just a few days after the cuts were signed into law, Stockman noticed something.
STOCKMAN: There was a horrific hole in the budget. In other words, the deficit had exploded or was projected to explode to levels never seen before in peacetime.
CHANG: Stockman convinced Reagan the tax cuts went too far, so over the next few years, there were some tax hikes. They had to stabilize spending. It was a lesson for future Republican administrations. Doug Holtz-Eakin was the Congressional Budget Office director under President George W. Bush.
DOUG HOLTZ-EAKIN: I'm a very conservative economist. I would love it if tax cuts paid for themselves, but I'm also someone who looks at the numbers. And there's just no evidence that the tax cuts actually pay for themselves.
CHANG: No question Trump's corporate tax cut could boost the economy. Businesses would invest in new plants, create jobs but probably not enough to cover the entire cost of that tax cut.
HOLTZ-EAKIN: It's just unlikely that you can move an economy that is approaching $20 trillion in size so much, so fast with a tax cut, that it will turn around and generate even more revenue.
CHANG: There is one other problem. What is the perfect corporate tax rate? Trump says 15. Laffer? Well, he advised Trump, but his answer's a little different.
How do you know that 15 percent is the magic point?
LAFFER: I don't know that it is, but I do know it's a heck of a lot less than 35 percent.
CHANG: Less is a concept most conservative economists can agree on, but no one seems to be able to prove exactly how less will amount to more. Ailsa Chang, NPR News.
(SOUNDBITE OF CLORINDE'S "PEGASUS") Transcript provided by NPR, Copyright NPR.