If anything other than naked opportunism and donor payback could explain Republican supply-side orthodoxy, it would be a theory attributed to a napkin sketch that ultimately convinced a future vice-president of the United States and his pal Don Rumsfield that indeed, they could get more by getting less. And unicorns.
Art Laffer's career can be best summed up not by that fateful conclave of confirmation biases huddled around a table at the Two Continents Restaurant, but rather, by his very short and ignominious tenure at the Office of Management and Budget. Laffer is widely known for lazy thinking, and his stint in Washington displayed the full depth and depravity of his bumbling, simplistic approach to the complex problems for which his PhD in economics should have prepared him. And yet, while calculating a prediction of the GNP in 1971 for the President of the United States which would be used to inform public policy for the largest economy on earth, Laffer used just four economic indicators, interest rates, the rate of money supplied by the Fed, stock prices, and Federal spending. He chose these indicators based upon interesting criteria having, basically, to do with the enhanced regard Laffer has for the Galtian figures who run Wall Street. Needless to say, his calulations were very, very wrong, and he was mocked and ridiculed and left government in disgrace. But Laffer's work at the OMB was prescient in at least one way, it gave us all a preview of exactly how Laffer would approach macroeconomics for the rest of his career.
The premise of the Laffer Curve is simple. That should probably be your cue that it's dead wrong, since it purports to have the predictive power of revenue returns for any given rate of taxation, and therefore should likely be pretty damned complex, one would think. It goes something like this:
The basic idea behind the relationship between tax rates and tax revenues is that changes in tax rates have two effects on revenues: the arithmetic effect and the economic effect. The arithmetic effect is simply that if tax rates are lowered, tax revenues (per dollar of tax base) will be lowered by the amount of the decrease in the rate. The reverse is true for an increase in tax rates. The economic effect, however, recognizes the positive impact that lower tax rates have on work, output, and employment--and thereby the tax base--by providing incentives to increase these activities. Raising tax rates has the opposite economic effect by penalizing participation in the taxed activities. The arithmetic effect always works in the opposite direction from the economic effect. Therefore, when the economic and the arithmetic effects of tax-rate changes are combined, the consequences of the change in tax rates on total tax revenues are no longer quite so obvious. - Arthur Laffer
So basically, from the man himself, we have an explanation that yields the infamous graph itself.
The idea behind the Laffer Curve, and thus behind supply-side economics and Randian Objectivism itself, is just this, that a 0 percent tax rate will yield 0 revenues because no attempt to collect taxes are made, while a 100 percent tax rate will also yield 0 revenues because nobody will work if their earnings will only be siphoned off by the government. In Laffer's world, apparently, the strong economic growth experienced while the US had a top marginal rate of 93 percent never happened, and the little people who comprise roughly 95 percent of America's workforce contribute nothing whatsoever. Make no mistake, this formula of Laffer's that has proven to concentrate wealth into the hands of a very, very few wasn't a mistake and that concentration of wealth wasn't an unintended consequence. It was the point.
Laffer's theory, for want of a better scatological term, is total bullshit. It relies upon a pair of premises that appeal to the mated desires of wingnut mathematicians and millionaires everywhere. On the one hand, lower taxes, no matter the consequences for the rest of us, have always warmed the cockles of the Scrooges who don't want to pay this country for the benefits of the civilization that allowed them to accrue their wealth in the first place. On the other hand, wingnut mathematicians like simple, and Laffer is nothing if not a simpleton.
If you're thinking about the economy, and you're trying to tease out the various elements that drive it and create growth and prosperity, what's the one single force within any economy that you simply can not neglect to account for if you're formulating an economic theory? That's right, kids! Consumers! 60-70 percent of the American economy is made up of consumption spending! That's average joes, middle class people with cash and an impulse to spend it on food and durable goods and commodities. This is how our economy goes from here to there, and it is completely absent from Laffer's economic theory. Instead, like the name suggest, he focussed on the monied "supply-side" class in an early reiteration of Jean Baptiste Say's notion that supply creates its own demand. Because, as everyone can see from our current hellscape of an economy, putting money into the hands of the wealthy ALWAYS keeps an economy strong.
In his rush to concentrate wealth in the hands of investors and entrepreneurs (old timey talk for "job creators") in the name of growing the economy, Laffer neglected roughly 85 percent of the economy. He put all his hopes for growth in the economy in the portfolios of trust fund babies and captains of industry. And, because he happened to be in the right place at the right time, and because Irving Kristol, the founding father of neoconservatism and an ardent convert to what would later be called supply-side economics was connected to Laffer's biggest fan, Jude Wanniski, a movement was born.
If you ever want to know why Republicans who truly believe in the myth of magical tax cuts that raise revenues for the government despite mountains of historical evidence, here's your guy. Art Laffer, lazy, incompetent, unrepentant economist, whose theory can be punctured by anyone with the slightes macro-understanding of macroeconomics, got lucky. And the rest is history.
