Economist Arthur Laffer is the latest to receive the prestigious Presidential Medal of Freedom from U.S. President Donald Trump.
Laffer is best known for his ideas on maximizing tax revenue by adjusting tax rates, ad his ideas were influential in shaping U.S. tax policy in the 1980s.
After getting his M.B.A in international economics from Stanford in 1972, Laffer joined the Office of Management and Budget as chief economist. Laffer was famously a supply-side economist, and his theories revolved around the idea that lowering tax rates would ultimately lead to stronger economic growth and eventually more tax revenue for the U.S.
Laffer is perhaps best known for his "Laffer curve," the following theoretical plot of the relationship between tax rates and tax revenues. The maximum potential tax revenue (T*) is contingent on a number of factors, including worker’s employment, leisure and income preferences, society’s technology and investor behavior.
Laffer first presented his Laffer Curve to President Gerald Ford’s administration back in 1974 in an attempt to dissuade Ford from raising taxes. Laffer used his curve to argue that raising taxes on businesses would actually discourage them from investing and growing, thereby reducing the total amount of tax revenue generated.
Laffy’s theories of supply-side economics were again used as the basis for Ronald Reagan’s massive tax cuts in the 1980s. Supporters of the tax cuts praised supply-side economic theory when the U.S. economy boomed and tax revenue jumped from $517 billion in 1980 to $909 billion in 1988.
Critics of the Laffer Curve have said it's an overly simplistic model with no indication of the shape of the curve and no clear way to determine the optimal tax rate. In fact, several researchers and economists have subsequently attempted to calculate the tax rate that would generate the highest revenue and found T* is likely in the 65% to 70% range, much higher than the current U.S. tax rates.
Laffer And Trump
Laffer served as an advisor to President Trump’s campaign in 2016 prior to his tax cut plan that was enacted in 2018. U.S. tax revenue increased slightly from $3.32 trillion to $3.33 trillion the year the cuts were implemented.
In 2018, Laffer co-wrote the book “Trumponomics: Inside the America First Plan to Revive Our Economy” along with Stephen Moore.
Understanding US-China Trade Negotiations: The Ultimatum Game
Odds Of 2019 Fed Rate Cut Are Increasing
Photo credit: "Art Laffer explains the Laffer Curve"
See more from Benzinga
- This Day In Market History: S&P 500 Quotes Delivered Every 15 Seconds
- Understanding US-China Trade Negotiations: The Ultimatum Game
- Druckenmiller: Global Debt A Looming Problem
© 2019 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.