Friday, March 15, 2013

Art Laffer and Calvin Coolidge

Art Laffer was President Reagan's economic adviser and is probably best known, at least in economic circles, for the concept known as the "Laffer Curve".  Although he wasn't the first to recognize that higher tax rates frequently don't lead to higher tax revenues, he was the first to label the phenomena, market it, and put it to large-scale use.  Basically the LC notes that higher tax rates often shrink the economic pie, whereas lower tax rates allow the pie to grow larger.  Thus, it is common for lower tax rates to actually result in higher tax revenues.  Consider: would you rather have 1/4 or 1/9 of a slice of pizza? It depends on how big the pizza is.  If the pizza is large enough, 1/9 could be larger than 1/4 of a smaller pizza.  Thus the LC conclusion: make the pie larger via lower rates and you'll end up with more tax revenue (this, of course, drives Dems crazy!).

Where am I going with this? Well, in a very worthwhile article at the Mises Institute, Professor Emeritus of Economics John Cochran links together the Laffer Curve and the frugality of Calvin Coolidge while simultaneously reviewing Amity Shlaes new book on Coolidge (not sure how it happened, but I'm on somewhat of a Coolidge binge at the moment!).  Here's a revealing passage:
Shlaes discussed the “‘scientific taxation’—an early formulation of the Laffer Curve” advanced by Coolidge and his Treasury Secretary Andrew Mellon. Coolidge argued against higher tax rates, saying, “Experience does not show that higher rates produces larger revenue. Experience is all the other way. When the surtax on incomes of over $300,000 and over was but 10 percent, the revenue was about the same as it was at 65 percent.” 
Read the entire article here.