Those who don’t learn from history are doomed to repeat it. And when those who fail to learn hold the reins of power and society’s purse strings, they do so at our expense. “Taxes Have Consequences: An Economic History Of The United States” by Art Laffer, Brian Domitrovic and Jeanne Sinquefield is a concise, engaging treatise in economic history that makes the case for why and how periods of prosperity and decline alike have been driven by politicians’ decisions around taxing wealth.
Laffer brings to bear his expertise and track record as the economic advisor behind Reagan’s historic 1980s tax cuts, which ushered in a period of American prosperity and economic strength that eventually helped the free world come out on top of the cold war. But far from writing a love letter to capitalists, Laffer & co. instead, apply a pragmatic lens to explain how decisions about how to tax income create incentives that drive human behavior towards either productive or unproductive ends.
When top rates of American income tax are high, the rich have responded by using a complex system of entirely legal loopholes, tax shelters and investment vehicles to conceal their wealth- often with the blessing of governments themselves. From the restaurants hosting the decadent boozy corporate lunches of 1960s Manhattan, to the burgeoning art collection and yachting industries, to the decidedly less glamorous market for tax-exempt local government municipal bonds… the winners of income tax rate hikes on the top end tend to be as varied as they are absurd. As a result of these policies, virtually no individuals have actually paid income tax at historically high rates.
Ironically, the ultimate losers of these policies have tended to be the middle and working class who miss out on the jobs and opportunities that would otherwise have been created had the money gone towards its most productive ends. And that’s exactly what has tended to happen throughout American history immediately after historic tax cuts under governments of red and blue stripes alike, such as those under the Kennedy and Clinton administrations, as well as the Trump administration’s more recent Tax Cuts and Jobs Act that helped bring back millions in revenue from American multinationals invested overseas.
Rather than shrinking the pie by depleting government revenues for social services and programs, these cuts have led to windfalls as wealth otherwise hidden or locked away has instead been allocated towards entrepreneurship, productive capital goods, job creation, and other ends that grow the pie for everyone.
None of this requires that we assume benevolence or even genius on the part of the wealthy. After all, they’re driven by their own ambition, greed and self-interest. And those who lack acumen of their own have the resources to access the best advice available from the very best lawyers, accountants and business advisers. Laffer and co. make the simple argument that greed and ambition can either be suppressed in a way that leaves behind few or no winners, or it can be harnessed for positive ends.
In making their case, the authors bust conventional mythology behind the causes and effects of historic episodes like the Great Depression, the post-war boom, and the global financial crisis, using data and historical facts. They demonstrate how periods of tax rate hikes intended to promote “fairness”, like Hoover’s early 1930s-era Scott-Hawley taxes, have always and inevitably been followed by declines in wealth and prosperity for both rich and poor Americans- such as the depression. And how, contrary to conventional wisdom or the narratives of partisan actors, America’s post-war economic boom had far more to do with war-time government getting out of the way and removing existing constraints on entrepreneurship and private innovation than it did with the radical expansionist programs of FDR. All of these arguments are backed by statistics, figures and a critical appraisal of claims that have gone unchallenged in public discourse for far too long.
Students of economics and those interested in the discipline will glean new insights that challenge mainstream discourse on liberal arts campuses throughout the country today. Lovers of history and Americana will be enthralled by interesting albeit lesser-known episodes and anecdotes of this nation’s great story and of the ingenuity of its people. Political tragics will be entertained and equipped with the empirical ammunition needed to understand and argue for how to resolve the problems facing the country.
At a time of record taxation and debt, spiraling inflation, and runaway government spending that seems to be increasingly endorsed by both sides of politics- “Taxes Have Consequences” is an important and timely piece of work from three of the nation’s sharpest economic minds. It reminds us that we need only embrace what we know works, rather than the discredited garden path of the zeitgeist.
• Satya Marar is a Washington-based policy professional, foreign-trained lawyer, and member of the Capitalist League.
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