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InsiderOnline Blog: April 2011

On Economic Growth: Three Questions for Arthur Laffer

Arthur Laffer, famous supply-sider and key economic adviser to President Ronald Reagan, will give a keynote talk at The Heritage Foundation’s 34th Annual Resource Bank next week. We asked him for his views on the economy:

InsiderOnline: You’ve predicted another crash this year. Do you still think that will happen, and if so why?

Arthur Laffer: About a year ago I predicted there would be a recession in 2011 if the Bush tax cuts were not extended. If you know they are going to raise tax rates next year, what will you do? You will accelerate income into this year, causing a recession next year. But by extending the tax cuts, Congress eliminated the prospects of a recession in 2011.

IO: What does the United States need to do in order to prevent another lost decade like the 1970s?

AL: Well, Washington really needs to recommit to pro-growth economics. And good economics is not partisan; it’s just economics. There have been great Democratic presidents like John F. Kennedy and Bill Clinton and great Republican presidents like Calvin Coolidge and Ronald Reagan—and each side has had its fair share of duds too. But in a long weekend you could put together all of the necessary legislation to really right this economy: a low-rate, flat tax; spending restraint; sound money (putting the Fed on a single mandate of price stability); free trade; and minimal regulation. If those changes were put in place, the economy would take off like you’ve never seen.

IO: Your research has found that the tax code is so complex that we spend $431 billion per year just figuring out how to fill out the forms and keeping track of records. What’s your ideal reform plan to simplify the code?

AL: My idea of tax reform is for Congress to enact a true flat tax, a la Jerry Brown's proposal in 1992. Congress should replace all federal taxes (except sin taxes, which are really designed to change behavior rather than raise revenue) with two flat-rate taxes, one on personal income and one on business net sales. This tax code would remove loopholes and almost all deductions, and the static revenue neutral rate would be less than 12 percent. Can you imagine what would happen to the United States economy if there were just two flat rate taxes of 12 percent?

Posted on 04/22/11 11:39 AM by Alex Adrianson

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