Arthur Laffer Is a Man with All the Reasons for a Big Tax Cut
04/09/1979 at 01:00 AM EST
Economist Arthur Laffer was having a drink with a colleague and a White House adviser in the Two Continents Restaurant in Washington, D.C. one evening in December 1974. The conversation was about the economy, taxes, the recession and what to do. Laffer set aside his wine, took a cocktail napkin and drew a simple graph: The line curved gently up, then plummeted back to the base. The colleague called it the Laffer curve, and there, amid the peanuts and the ashtrays, an economic theory was christened.
With the awful moment of truth—midnight, April 16—approaching, millions of Americans are grimly working on Form 1040 or alternative versions (there are some 75) of the individual income tax return. Others, in despair or hope (of finding loopholes), have turned the painful process over to accountants. Arthur Betz Laffer is one of those who needs help in coping with the IRS. "He has never prepared his taxes," says wife Patricia. "He has trouble balancing a checkbook"—which is surprising news, since Art Laffer may be the country's leading tax-policy expert.
In the past year there has been heated debate on Laffer's reputation. Some economists and politicians regard him as a fuzzy-minded professor whose economic schemes could bankrupt the country. Supporters claim Laffer is a fiscal genius who knows how to lower inflation, reduce unemployment, increase production and restore the quality of American life—all by tax cutting. Laffer's ideas were the intellectual justification for the property tax cut initiative in California, better known as Proposition 13, which mandated reducing real estate taxes by 57 percent. As the Laffer-supported tax rebellion marched eastward last fall, politicians quickly found reason for falling into step. California Gov. Jerry Brown, who began as a vigorous opponent of Proposition 13, reversed himself when it was approved by 65 percent of his electorate. "I'm a born-again tax cutter," Brown confided as soon as the votes were counted. "Politicians," Laffer sums up, "respond to the hoofbeats." The Republican National Committee has since endorsed the Kemp-Roth plan, which calls for reducing federal income tax rates by a third over three years, assuring that Laffer's philosophy will be a prime issue in the 1980 presidential campaign.
Though Laffer is a registered Republican, he claims his tax reform theory is nonpartisan. It is undeniably simple. He wants corporate and personal income taxes in this country reduced by about one third. The upshot, Laffer insists, would be a short-term loss of government revenues, but an eventual broadening of the tax base and a great boom in productivity and spending that would reduce inflation and spur the economy. The alternative—continued heavy taxation or small, ineffective tax cuts—will mean, Laffer gloomily predicts, diminished revenues for the government, a shrunken Gross National Product and the decline of the United States to Third World status. "When I was a kid in the '50s," he says, "the real GNP of the U.S. per capita was well ahead of that of the next highest nation in the world. Look at our ranking now. There are several countries ahead of us. Unless we do something, our kids will be living in the equivalent of Ethiopia."
Laffer justifies his prophecies of doom with that graph he drew on the cocktail napkin. Taxes generate government revenue, he explains, until a maximum point is reached. After that, more taxes discourage consumer spending and business investment, and revenues decline. Thus, if the tax rate is zero, there obviously will be zero revenue for the government. But if the tax rate is 100 percent, there will also be no revenues because production will halt. Taxation has now gone around the bend of Laffer's curve, the economist says, and has reached the point where incentive is being smothered and output curtailed. American society is beginning to suffer. "What you are now seeing is the complete deterioration of the U.S. economy," he warns. "It's beyond a debate at the Harvard Club, and Senate filibusters are irrelevant. Can you imagine a society that says if you achieve more, work harder, you must pay the state a larger percentage? It's not only ludicrous, it's absolutely debilitating."
While much of the economic establishment, from the right (Nobel prizewinning conservative Milton Friedman) to the left (Kennedy liberal Walter Heller), disagree with Laffer's theory as wrong or simplistic, no one can fault his credentials or his energy in traveling around the country promoting it. Proposition 13 architect Howard Jarvis is a soap-box orator who whips up tax reform enthusiasm in public forums. Laffer preaches the gospel more quietly in the corridors of power. "He combines insight and humor, which makes him interesting to important people," says a longtime friend, psychiatry professor Jerome Jaffe. "He also presents things succinctly, which has made him valuable to government people."
Each working morning Laffer rises before dawn and drives a second-hand Maverick, purchased for $500, the 27 miles to his office at the University of Southern California. He is at his desk by 6:30 a.m. On Mondays and Wednesdays he teaches two courses in macroeconomics—the study of production, employment and inflation. Midweek he usually heads East—to New York or Boston, where he is a general partner of H. C. Wainwright & Co. Economics, a consulting firm—or to Washington, where he frequently testifies before congressional committees. In between he sandwiches in as many as 100 lectures a year to business and political groups (his top fee is now $4,000, which he sometimes donates to charity) and writes learned articles for business journals. This year, for the first time, Laffer's income is more than $100,000.
He has adapted well to life on the wing, though he recently canceled what was to have been his second vacation in 16 years of marriage, pleading jet weariness. Actually, Laffer's height (5'7") enables him to sleep easily on planes. He regularly does deep knee bends in aircraft toilets and cuts down on alcohol when airborne on the theory that, combined with atmospheric pressure, "it dehydrates you and is bad for the prostate gland." At 38 Laffer thrives on the feverish pace. Patricia, 37, long ago resigned herself to life with a part-time husband. "Sometimes I get ticked," she says, "but when I think that it's not just a case of putting work first but work that will benefit others, it makes enormous sense—my kids and my kids' kids will benefit." Patricia copes with her frustrations by running up to five miles a day. "I can go out mad as a hatter," she says, "and come back calm. It's the only way I can stay married to a lunatic."
There were mild aberrant signs from the earliest years. "Arthur is a ball of fire, full of energy and raring to go," a third-grade teacher wrote on his report card. "Just a little more self-control, Arthur." The youngest of three sons of an affluent Cleveland industrialist, he grew up in exclusive Shaker Heights. His mother recalls a devilish streak; as a boy, he filled the bathtub with fish when guests were in the house and played tricks with the plumbing to alternately freeze and scald his brothers when they took a shower. He has an irritating tendency to act surprised that not everyone is as well informed as he. "More than anything else he enjoys zapping people by being smarter," says a former colleague. "It's not exactly vicious, but done with a sense of personal enjoyment, the way some people enjoy games."
At Yale Laffer was a dilatory student, in danger of flunking out, when a dean advised him to take some time off to grow up. So at 20 he went to Germany for a year, where he calculated tax bills in a Freiburg factory and took courses at the University of Munich. On a train returning from an excursion to Greece, he met Patricia Couryer, a Scottish lass, and the two got on famously. "Arthur was almost Charlie Chaplinish," she recalls. "He was wearing an overcoat given him by a professor who was 6'4", and his shoes had holes in them. My sister said, 'Where did you find him?' " Nevertheless, romance bloomed and was nurtured by correspondence after Patricia went back to London, where she was an au pair, and Laffer returned to Yale. She says, "He wrote me letters, telling me about the Indians, buffalo, crossing the plains, and how I'd love this country. He also quoted Goethe to me. He was a nice guy and I guess I was a cute girl." They were married in Scotland in 1963.
Laffer had resumed his studies in New Haven with dedication, made the dean's list in his senior year and went on to get his M.B.A. and Ph.D. in economics at Stanford. As a popular professor at the University of Chicago, he won tenure at the age of 28, and coped with a Laffer curve of another sort when his weight mushroomed up to 235 pounds. "I ate too much," he says simply. Patricia believes, "It was because of all the pressure—he got super compulsive." Laffer devised a reducing plan as drastic as his tax scheme, coupling a Spartan 240-calorie-a-day diet with daily immersions in Lake Michigan ("The cold water helped drain off my body heat"). He shed 50 pounds in 40 days and another 25 pounds soon thereafter. Now he is inclining to heftiness again (175 pounds) because of the dinners he must attend. (When ordering on his own he relishes sushi—and of course knows the names of all the fish in Japanese—and steak broiled exactly 12 seconds per side.)
At the University of Chicago Laffer impressed George Schultz, head of the School of Business, and when Schultz went to Washington to run the Office of Management and Budget in 1970, he took Laffer along as his assistant. The next year, as the brashest of whiz kids in the Nixon administration, Laffer made headlines rosily predicting a GNP of $1,065 billion—a forecast his fellow economists found hilarious. The GNP did in fact rise to $1,063.4 billion, if only briefly, proving that Laffer was a prophet with some honor.
After two years in Washington Laffer returned to Chicago, and in 1976 accepted an invitation to teach at USC. Home is now a four-bedroom, ranch-style house at Palos Verdes, south of Los Angeles, which is worth $225,000—nearly twice Laffer's purchase price. The Laffers and their four children, aged 6 to 15, share the place with a menagerie of turtles and parrots and a pet weasel. Laffer also raises some 300 varieties of cacti. On his rare days off, he putters in the prickly garden with a macaw on his shoulder.
It is during these moments that he reflects on the future and what it holds for his students and children. "I love them dearly, but their world is so gloomy compared to mine. When I got out of school I had 12 job offers—and I could think of music, art and poetry because I had a job. They've got to run around and be self-serving because they need jobs."
Laffer admits, with candor, that he can't prove his tax-cut plan will work until the big knife is applied. He agrees that his theory is not original; it dates back at least to Adam Smith, the 18th-century Scottish economist. He also agrees with the message, if not the methods, of Franklin D. Roosevelt, who said, in the depths of the Depression: "The country needs, and unless I mistake its temper, demands bold, persistent experimentation. It is common sense to take a method and try it. If it fails, admit it frankly and try another. But, above all, try something."