Saint of libertarian economics: Arthur Laffer
There are many saints of economic libertarianism. For this post I profile one of them: Arther Laffer.
Laffer (still alive today) was a relatively unimportant economists, though prominent enough to be at a meeting in 1974 with Donald Rumsfeld and Dick Cheney, at which a divine miracle happened in the form of him drawing a squiggly line on a napkin which became known as the Laffer Curve which proved, once and for all, that high taxes are really really bad.
Now, to give a certain amount of fairness to Laffer’s point of view, the top marginal income tax rate in 1974 was 73%, but at the same time there was only a 35% capital gains rate, plus there were a lot of loopholes which allowed taxpayers to present their income as capital gains, and even bigger loopholes which allowed taxpayers not to show any income at all (pass-through of partnership losses because of accelerated depreciation played a big part in those loopholes). The corporate income tax rate was also lower than the personal income tax rate, which encouraged wealth to be kept in corporations rather than paid out as dividends. They say that there’s no avoiding death or taxes, but in fact the 73% tax rate in 1974 was avoidable, which meant that tax collections were a lot lower than 73% of true income, and also that a lot of business activity went into tax avoidance rather than productive growth of companies.
I could state a general rule of tax avoidance behavior, which is that if different types of income have different rates, then over time an increasing percentage of declared income will be of the types that have the lower rates. I applaud the efforts during the Regan administration to reform the tax code by closing loopholes, which did in fact result in higher tax collections despite lowering the top rates.
I have stated before my belief in the importance of closing tax loopholes and eliminating tax deductions. If there’s a need increase tax revenue, we should always attack loopholes and deductions before raising rates. However, for each loophole or deduction there’s a strong lobby behind it. This is because, unlike libertarianists, real-world rich people see wealth as a zero-sum game: so as long as everyone’s tax rates increase, their status in the economic pecking order remains unchanged, so they aren’t actually harmed by higher tax rates, they are only harmed if a deduction or loophole which benefits them in particular is eliminated.
Libertarianists, have come to worship the Laffer Curve as proof that all taxes are evil and their worldview is correct, much like Christians see the Shroud of Turin as proof that Jesus really existed. From the libertarianist comments on my blog, I see that they think that current tax rates like the 39% top income tax rate or any amount of estate taxes are causing rich people to retire and stop working entirely, much like the rich people of Atlas Shrugged.
Why is it even a problem if rich people want to retire? It’s only a problem if you take the Atlas Shrugged point of view that rich people are needed to make the economy function and if they stop doing work, there aren’t any people with modest incomes who could step in and take their place.
However, the libertarianist point of view doesn’t make any sense if you assume that rich people behave rationally and want to be richer than their peers. Who would pass up the opportunity to make a billion dollars on account of the fact that 50% of it, or even 70%, of it was taxed? Isn’t it better to have $300 million than to have nothing? I would say it’s a hell of a lot better. I hear about all of the amazing businesses that have not been formed because the tax rates are too high, and it’s all nonsense. No one who starts a business is thinking about what happens to their estate after they die. Libertarianists, despite thinking of themselves as rational economists, are clueless about why people start businesses. And even if they did think about estate taxes, if they were even the slightest bit rational they would realize that it’s much better for their children if they die rich than if they die middle-class or die poor, and that would still be true if estate taxes were increased significantly over their current levels.