Arthur Laffer

Some Oklahoma politicians have trumpeted a report by economist Arthur Laffer to claim that eliminating the state income tax will fuel an economic boom. Laffer is best known for the Laffer Curve, which he famously sketched on a napkin while meeting with Dick Cheney in a hotel bar. It went on to form the basis of the Reagan administration’s trickle-down economics.

The Laffer Curve makes an obvious point: government revenues peak at a tax rate somewhere between zero and one-hundred percent. In the lower half of the curve, raising taxes will increase revenue, but go too high and the reduced economic activity due to excessive taxation will result in lower revenue.

The argument was not original to Laffer. It had been stated previously by thinkers ranging from 14th Century Arab philosopher Ibn Khaldun to John Maynard Keynes, the founder of modern macroeconomics. What made this idea influential in recent decades was not any special insight into economics, but its powerful appeal for politicians. Rather than explaining how tax cuts (popular) would be paid for by budget cuts or increases in other taxes (unpopular), they could simply claim that the tax cuts would pay for themselves.

However, whether a tax cut will result in higher or lower revenue depends on where you are on the curve. Estimates of the revenue-maximizing tax rate differ, but defenders of tax cuts have a much stronger claim when the top marginal rate is 70 percent, as it was at the beginning of the Reagan administration, than they do when the top rate is 35 percent, as it is today.

Laffer Curve with a maximum revenue point at about a 70% tax rate, based on "How Far Are We From The Slippery Slope? The Laffer Curve Revisited" by Mathias Trabandt and Harald Uhlig.

That doesn’t stop politicians from repeating to the point of absurdity the idea that all tax cuts lead to revenue growth. In Oklahoma, the top marginal rate is only 5.25 percent, and the average family pays an effective rate of less than 3 percent. No credible economist will argue that cuts from such a low starting point can pay for themselves.

To be fair, Laffer doesn’t say this either. His report argues that increases in other tax revenues will replace just one-half of what would be lost by eliminating the personal income tax. Even that much rests on rosy predictions for the economy and the highly questionable assumption that the state income tax is the most important variable for economic success.

Most people realize the picture is more complicated. Oklahoma’s economy is vastly more affected by oil and gas prices, as well as national and global economic trends, than it is by our modest state income tax. Tax cuts won’t put more oil in the ground or protect us from a European collapse.

Laffer also conveniently leaves out the obvious point that budget cuts have a cost. The economic benefit of a modest increase in individual income would be countered by cutbacks in what we can accomplish collectively, with fewer resources to ensure good schools, well-maintained roads, and a safe and healthy community. We have already slashed budgets for three consecutive years, and the result is larger class sizes, fewer officers on the streets, and longer waiting lists for treatment of children with disabilities, to name just a few.

It comes down to this: Arthur Laffer’s work leaves out more than it includes, because his goal is never to provide an accurate economic assessment. It is to tell politicians what they want to hear. As Jay Bookman put it, “It’s like telling someone with an obesity problem that the best way to lose weight is to always eat more ice cream — more times than not, their eagerness to believe overwhelms any skepticism.”

As a result, we keep going further down the tax cut rabbit hole. At least one lawmaker has already said that eliminating the income tax should be the first step towards… more tax cuts. Where does it end?