In the Arena

Rattner Refutes Laffer

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In 1974, the economist Arthur Laffer drew a protuberance on a napkin at a White House meeting “demonstrating” that the higher the tax rates are, the lower the revenues they produce. Thus, the birth of supply side economics, a theory that has been disproved dispositively over the past 40 years. The reason why the Laffer Curve is nonsense was demonstrated in a single sentence by Steve Rattner in a New York Times op-ed over the weekend:

During my 30 years on Wall Street, taxes on “unearned income” have bounced up and down with regularity, and I’ve never detected any change in the appetite for hard work and accumulating wealth on the part of myself or any of my fellow capitalists.

Masters of the Universe have hunting and gathering hard-wired. If money is how they keep score–and it is, in most cases–they would be hustling to become market legends if the marginal tax rate were 99%. There have been instances when a lower capital gains tax rate spurred increased revenue–the 1998 balanced budget deal, for example–but that’s usually a one year phenomenon, as investors take advantage of lower rates to sell off assets they’ve held for a while. The notion that a change in the marginal tax rates from 35% to 39.6% would diminish economic activity, or spending, on the part of the mega-wealthy is ridiculous. (Indeed, the Laffer argument has been used as camouflage by those like Grover Norquist who really just want to see a smaller government.)

The fact is, tax rates for the wealthy are at historic lows. They will soon rise. The effect on the economy will be negligible. Kudos to Mr. Rattner for speeding this understanding along.