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Digital Subscriptions > Newsweek International > 12th May 2017 > DEGRADING ON THE CURVE


Trump’s tax cuts ignore history and arithmetic to make the rich richer

IT ALL STARTED in December 1974, on Dick Cheney’s cocktail napkin.

Four Republicans had gathered that night at a restaurant in Washington, D.C., and the conversation turned to economics and taxes. The group—Cheney, then the deputy White House chief of staff and the future vice president; Donald Rumsfeld, then the White House chief of staff and future defense secretary; and Jude Wanniski, an editor with The Wall Street Journal—watched in interest as the last member of their party, economist Arthur Laffer, scribbled a chart on what would become the napkin that changed America.

With his tissue-paper chart, Laffer espoused what the group deemed a brilliant idea. The relationship between taxes and revenues, Laffer argued, was something of a bell curve. At a zero percent income tax rate, the government would bring in no revenue. But the same held true at a 100 percent rate, since no one would have the incentive to work if all of an individual’s income went to taxes. So, somewhere along the curve charting taxes to revenues, there was the perfect number—tax rate—that would bring in the most money for the government. At that one point, not only would efforts to avoid taxes through clever accounting drop, but people would work more and the economy would boom, with the result that the Treasury would be showered in cash, an idea advanced by a group known as supply-siders.

Viewed in a closed economic system where only income tax rates determined revenues, Laffer’s theory seemed theoretically powerful. And that was the genesis of what would become a more than four-decade mantra of Republican politicians—tax cuts increase revenue and pay for them selves. Now, with the recent proposal by the Trump administration for massive corporate and personal income tax cuts, the Laffer curve is back, as GOP politicians trot out the same old argument that decreasing rates will bring down deficits.

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