Last week at the President Ronald Reagan Ranch Center in Santa Barbara, Calif., the staff made a nice move. On the occasion of the publication of the first volume of the collected works of the progenitor of supply-side economics, Arthur B. Laffer, out from storage and onto display came the original wicker table on which Reagan, at the ranch, signed the great tax cut of 1981.

That law has proven one of the most decisive of contemporary American history, marking the end of stagflation and the beginning of one of the greatest waves of entrepreneurialism and prosperity that the nation has been fortunate to see. The volume is called The Pillars of Reaganomics. Its contents are ten representative papers by Laffer and those in his employ since 1978, selected by me, the editor.

We can now say once and for all that supply-side economics was published on more than a napkin—as in when Laffer sketched his tax-cut ideas on a cocktail serviette at a Washington restaurant to President Ford staffers in 1974, the most famous story in supply-side history. Actually the paper—as in scholarship—trail is voluminous. Here is volume one for a representative first sample.

The “Laffer curve” is the most notable economics graph of the 20th century. It shows (as Laffer explained to the Ford people in 1974) that at a certain point, tax rates can get so high that they result in less revenue for the government than would be the case if taxes were cut.

Reagan’s opponents pounced on the Laffer curve, arguing that it was “snake oil.” When the big budget deficits of the 1980s materialized, following the tax cut, the evidence was in that the United States had not been at the tipping point of the Laffer curve in 1981. How misleading the propaganda for the curve had been.

The funny thing about the critics of supply-side economics is that they never cite anything. No footnotes. I puzzled about this myself five years ago when I wrote a history of supply-side economics, Econoclasts. I pointed out that despite there being 20,000 registered historians in the United States, which is to say people who must cite sources, plus goodness knows how many economists, interpretation and criticism of supply-side economics which called on and referenced primary sources was close to the null set.

It hit me when I visited the Jack Kemp archive at the University of Buffalo in 2007. Here was the most influential Congressman of the 20th century (and the author of the Reagan tax cut, known as “Kemp-Roth”), and I had to open the containers of his files with box cutters. They had been wrapped in postal tape since they had been shipped out of Washington when Kemp left Congress in 1989.

One thing these files produced was the Kemp-Roth revenue projections on the part of its sponsors. The numbers were not only modest, they showed losses to the federal government. These were press releases too, meaning that later critics had no excuses when they said that the supply-siders had made phony assurances that revenues would boom after tax cuts.

When it came to Laffer, there was really only one citation anyone ever made concerning his forecast of receipts following tax cuts. It came from a spring 1981 issue of the Cato Journal. Here’s what Laffer wrote:

“It is reasonable to conclude that each of the proposed 10 percent reductions in tax rates would, in terms of overall tax revenues, be self-financing in less than two years….It should be noted that a significant portion of these revenues would accrue to state and local governments, relieving much if not all of the fiscal distress evident in these governmental units as well.”

Now in point of fact, the “proposed 10 percent reductions in tax rates” did not come to pass. There was a 5 percent tax cut at the end of 1981, and then one scheduled for 10 percent in July 1982, threatened with repeal until June 1982. Then another 10 percent in 1983.

You might ask, then, if the tax cuts were self-financing after 1984 or 1985, to test Laffer’s projection. But then there is the other line, which I do not believe any critic of supply-side economics has ever cited: “a significant portion of these revenues would accrue to state and local governments….”

The idea here is that a federal tax cut will cause a great economic boom, a boom which will occur in the context of fifty states with their own independent tax systems. These tax systems will rake in the revenue on account of the federal tax cut.

When Laffer said tax cuts could maintain or increase revenue, he said, explicitly, it would come across all governmental entities.

How’d that work out? Over the seven years of the Reagan boom, 1982-89, combined federal, state, and local revenues went up by 34.5 percent in real terms, 4.3 percent per year. This is far above the historical rate of economic growth and implies that government will take over the economy unless it in turn grows as much. Fortunately, over this run, economic growth was also 4.3 percent per year, a third higher than the norm.

Laffer’s idea was a fudge, though—right? This idea of counting revenue from state and local places after a federal tax cut is some sort of snake oil, a trick too-clever-by-half to cover up the hole blown in the federal balance sheet by the tax cut—surely.

Except this was the way everyone, Democrats above all, always talked about tax cuts. In 1963, as President John F. Kennedy was shopping his tax cut (which Kemp-Roth would emulate), its supporters pointed to the wonderful results it would bring to the states and the localities.

Sen. Paul Douglas, Democrat of Illinois, probably the greatest Keynesian ever to hold official power in the United States, did a study showing a state like Maryland would rake in another $48 million ($400 million today) should the feds cut their own tax rates by 30 percent. As talk grew of an even bigger federal tax cut in 1963 and 1964, state revenue agents lobbied Washington to go for it. It would mean more money for their petty enterprises.

All in the archives, again, ink on paper, “Board of Revenue Estimates” stationery in fact. The dismissal of the Laffer curve on the grounds of the evidence of the 1980s is weird enough. Government revenues did go up, and too much in fact, after the tax cuts.

Now it emerges that the record of tax cuts before Reagan’s has been obscured. One of the reasons Laffer’s argument about the states got minimal citations is that everybody blew off the fact that Democrats had traditionally made these arguments in favor of their own tax cuts.

The Pillars of Reaganomics is the first of several volumes that will make it easy to cite real sources in the history of supply-side economics. Here they are, published. And any prospects we have for productive fiscal and monetary reform can only be enhanced by sharper historical understanding.

Republished with gracious permission of the author. 

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