Laffer’s Curveball

by | Nov 21, 2001

Arthur Laffer’s op-ed piece in the Wall Street Journal (November 21, 2001) will set supply-side tongues wagging — or more likely, supply-side teeth gnashing. The upshot is: Laffer is endorsing the idea of a 10-day federally underwritten suspension of state sales tax. He says, “The resulting burst in activity could give a real boost to […]

Arthur Laffer’s op-ed piece in the Wall Street Journal (November 21, 2001) will set supply-side tongues wagging — or more likely, supply-side teeth gnashing.

The upshot is: Laffer is endorsing the idea of a 10-day federally underwritten suspension of state sales tax. He says, “The resulting burst in activity could give a real boost to our faltering economy.” Oh, how the mighty have fallen — that the man who sketched what became known as “the Laffer Curve” on a cocktail napkin and launched the Reagan tax revolution could sink to these depths of demand-side depravity.

Oh, he tries to dress it up in supply-side clothing, saying “An across-the-board sales-tax holiday is virtually the same as an across-the-board income-tax rate reduction. People don’t work to pay taxes — they work to acquire goods and services. As such, there is a precise equivalence between product taxes and income taxes.” That may be true for that fraction of people’s earnings that they target for consumption. But if you are working in order to save or invest — or, for that matter, to acquire services that are generally exempt from state sales taxes anyway — then this simply doesn’t apply.

No, it’s worse than that. Because this tax incentive only kicks in when you consume — and it kicks in whether or not you produce. You can always consume out of wealth you produced in the past. Laffer tries to get away with the whopper that “People would work as much overtime as possible during that 10-day period,” but that makes heroic assumptions about behavior, the way people are compensated, and the opportunities available to them. Let’s face it: this isn’t about creating incentives to produce anyway. This is above creating incentives to consume.

What about “demand-side” don’t you understand, Arthur? Don’t you remember that production creates, and includes within itself, the option to consume? But consumption lies entirely interior to production: consumption does not include the option to produce. And therein lies the unique power of supply-side economics to create new cycles of wealth.

Even if stimulating consumption were a worthy goal, a temporary suspension of consumption taxes will do little more than cause people to move their consumption from the future to the present — and once only. When that’s done, that’s done.

Maybe Laffer has grown so despondent about President Bush getting any tax cuts passed at all that he wants to throw his prestige behind even this silly idea, just because leftist senators Patty Murray and Olympia Snow are pushing it. But — good grief — does Laffer have to add insult to injury by saying this is “…the best short term tax stimulus I’ve seen in ages”?

Don Luskin is Chief Investment Officer for Trend Macrolytics, an economics research and consulting service providing exclusive market-focused, real-time analysis to the institutional investment community. You can visit the weblog of his forthcoming book ‘The Conspiracy to Keep You Poor and Stupid’ at www.poorandstupid.com. He is also a contributing writer to SmartMoney.com.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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