America Needs a Supply-Side Comeback

By Allysia Finley

Soon after Gerald Ford became president in 1974, Dick Cheney and Donald Rumsfeld—both serving in the White House—met economist Art Laffer and Wall Street Journal editorial writer Jude Wanniski for dinner at a Washington restaurant to discuss their disagreement with the president’s support for raising taxes.

Mr. Laffer sketched a bow on a napkin depicting the relationship between tax rates and government revenue—the eponymous Laffer Curve. It depicts the proposition that tax revenue rises with marginal tax rates only up to a point— beyond which revenue starts to decline as people work and invest less. Mr. Laffer scribbled on the napkin: “If you tax a product less results. If you subsidize a product more results. We’ve been taxing work, output and income and subsidizing non-work, leisure and unemployment. The consequences are obvious!”

Perhaps today, but they weren’t always. Over the last 50 years, the loquacious Mr. Laffer has been a driving force in supply-side economics, which has resulted in lower taxes and higher living standards. His insight helped shape the 2017 Tax Cuts and Jobs Act, which slashed the corporate tax rate to 21% from 35% and cut the top personal income-tax rate to 37% from 39.6%.

Donald Trump notes in a foreword to Mr. Laffer’s 2022 book, “Taxes Have Consequences: An Income Tax History of the United States”: “Businesses responded to the greater incentives: they earned more, their workers earned more, products were produced more efficiently, tax shelters shrunk, and noncorporate tax revenues rose by a good deal more than corporate tax revenues shrank!”

Today, some Republicans have forgotten the lessons of the Laffer Curve—or failed to learn them in the first place. They want to raise taxes on corporations and the socalled rich to raise more revenue to redistribute to the working class. Mr. Laffer has one word for them: Don’t.

“Every single time we’ve raised tax rates on the top 1% of income earners, every single time, the economy has underperformed. Every single time we’ve raised tax rates on the top 1%, tax revenues from the top 1% of income earners goes down,” Mr. Laffer says in a video interview from his home in Nashville, Tenn. “Every time we’ve cut tax rates on the rich, the economy has outperformed.”

Mr. Laffer walks me through a brief history of the income tax. Since the 16th Amendment was ratified in 1913, the top marginal rate has ranged between 7% (1913) and 94% (1944). Taxes paid by the top 1% have remained relatively constant, ranging between 1% and 3% of U.S. gross domestic product.

When taxes go up, the rich report less income, either because they use tax dodges that Congress has allowed or because they work and invest less. When taxes go down, they earn and realize more income, and government revenues increase.

This is what happened during the Roaring ’20s as the top rate plunged to 25% from World War Iera rates of around 70%. But while most Americans were prospering, Mr. Laffer says, “there were a couple of losers”—namely farmers who suffered from low commodity prices.

The Republican Congress and President Herbert Hoover sought to help farmers by imposing tariffs. Other industries lobbied for protection from imports too. As the giant bill that came to be known as the 1930 Smoot-Hawley Tariff Act moved through Congress, stock prices plunged. Hoover nonetheless signed it on June 17, 1930.

The Dow Jones Industrial Average fell nearly 90% from its peak as other countries retaliated. Compounding the economic pain, Hoover pushed through a huge tax hike in 1932, which raised the top rate to 63%, despite Treasury Secretary Andrew Mellon’s concern about its effect on growth.

“Anything that flew, he taxed,” Mr. Laffer says of Hoover. “Anything that swam, he taxed it. Anything that dug a hole, he taxed. Anything that sat there and slept, he taxed it too.”

The rich responded as the Laffer curve would predict: They reported less income and employed tax dodges, such as incorporating yachts and equestrian ranches as businesses to pay for their leisure expenses. Tax-exempt municipal bonds were a favorite tax shelter. The unemployment rate climbed to 23% in 1932, and Hoover lost reelection in a landslide.

In Mr. Laffer’s telling, Franklin D. Roosevelt prolonged the Depression, first by requiring Americans to sell their gold to the U.S. government and devaluing the dollar. Then he hiked income taxes on the wealthy and taxed undistributed corporate profits to raise more money for the government to spend on welfare and public works.

Government spending crowded out private investment. Milton Friedman argued that the Depression was intensified by the Federal Reserve’s tight monetary policy. Mr. Laffer disagrees. In his view, it was the tax hikes, layered on top of the tariffs, that created the abject misery of the 1930s.

The lesson, he says, is that raising taxes on the rich makes everyone worse off. Cutting taxes on the rich makes everyone better off, which can be illustrated by what he calls the “go-go” years of the 1960s, the ’80s, the ’90s and the first Trump administration. “I like making the poor richer, and if that leads to more inequality, so be it,” he says.

Mr. Laffer got his start in politics serving as chief economist in President Nixon’s Office of Management and Budget, though he says he didn’t loudly press his lower-tax views. “Now remember, I was under 30 at the time, so I was pretty young, so I wasn’t experienced,” he recalls. “I was saying, ‘Well, I have this—I may be wrong.’ ”

Now 84, he’s much less reticent though as sharp as ever. Lyndon B. Johnson, Nixon, Ford and Jimmy Carter, he says, are “the largest assemblage of bipartisan ignorance ever put on planet Earth.”

Mr. Laffer is as colorful as his nickname, Art. At the beginning of our conversation, his dog’s snout pops into the frame. “Flying shark mouth here is. . . . Golly, look at that mouth!” he chuckles. He recounts a romance between his late dog Maddie and a neighbor’s German Shepherd: “So they’re now both buried together on the side of the hill up in Kentucky.”

Born and raised in Ohio, Mr. Laffer comes off as an affable Midwesterner, though he says he comes from genteel stock. Through his godfather, Justin Dart Sr., he got to know Ronald Reagan. Dart was a long-time adviser to the actor-turned-politician.

After earning a doctorate in economics from Stanford, Mr. Laffer taught economics at the University of Chicago and later at the University of Southern California’s business school. “I was in the . . . Reagan social set in Beverly Hills,” he says. “I lived in Palos Verdes’ Rolling Hills Estates.” But in Sacramento between 1967 and 1975, Reagan governed very differently than he did in Washington in the ’80s.

During his two terms, Reagan increased taxes more than any governor in state history. The blunder helped spur a tax revolt, in which Mr. Laffer played a key role. Proposition 13, a 1978 ballot initiative, capped state property taxes including for businesses. “If California were ever to lose Prop. 13, they’d become West Virginia in a long weekend,” he says.

Reagan learned from his tax mistake in California and was receptive to supply-side ideas, Mr. Laffer says. As an economic adviser to Reagan, Mr. Laffer championed the 1981 and 1986 tax bills, which together reduced the top marginal rate to 28% from 70%. Mr. Laffer had to battle other members of the administration to get the cut.

Republicans, he laments, have often “ been the tax collectors for the welfare state.” This is why he has often supported Democrats for president over Republicans. He backed John F. Kennedy, who favored a bill cutting the top marginal rate to 70% from 91%, which Congress enacted after his assassination. He also advised Jerry Brown, Reagan’s Democratic successor as governor, in 1992 on his presidential campaign proposal for a 13% flat tax.

He voted for Bill Clinton that year because he couldn’t forgive George H.W. Bush for breaking his no-new-taxes pledge. Despite Mr. Clinton’s tax increase in 1993, Mr. Laffer supported his re-election in 1996 because Republican nominee Bob Dole had “never seen a tax increase that he didn’t want to vote for.” He took vindication when Mr. Clinton and the GOP Congress cut the top capital-gains rate to 20% from 28% and enacted welfare reform.

Mr. Laffer’s income-tax history lesson shows that there has long been a high-tax and protectionist wing of the GOP. The populist bent of politicians like Vice President JD Vance and Missouri Sen. Josh Hawley doesn’t much worry him. Nor do Mr. Trump’s tariffs, which he thinks are a negotiating tool: “I think that when all the smoke clears and the dust settles, you’re going to see that we’re in a much freer-trade world, a much more peaceful world, because he’s going to use these that way. That’s my story—I’m going to stick to it.”

He rejects the claim that free trade has cost U.S. manufacturing jobs: “We in Tennessee have no problem with manufacturing. We got more car companies producing goods in our state that we can count. We want to get rid of ’em. We’re sick of all these production jobs. I’m just joking.”

By his lights, states like Illinois, Michigan, Ohio, Pennsylvania and Wisconsin have driven manufacturing jobs away with high taxes and other policies that raise business costs. Manufacturing jobs have increased in Florida, Georgia and Texas.

Some Democrats are moderating on cultural issues, but are any capable of following Bill Clinton’s example on taxes? He points to Colorado Gov. Jared Polis, who has said his state’s ideal income-tax rate “should be zero.” California Gov. Gavin Newsom also has the potential to be a tax turncoat.

“I think Clinton wanted to be president no matter what it took to be president, and I think Gavin Newsom fits into a Bill Clinton image,” Mr. Laffer says. “There’s nothing in California he couldn’t do that wouldn’t make it better. And then can you imagine, once he starts feeding on the process. . . . which is exactly what happened with Reagan.”

He means that cutting taxes can create a virtuous circle by generating positive economic outcomes for ordinary people, which boosts support for more tax cuts, which leads to stronger economic growth. Extending the 2017 tax reforms and cutting marginal rates even more—he suggests a 15% corporate rate—could drive a flywheel of economic prosperity.

Some provisions in the GOP House tax bill, like the auto interest deduction and expanded child tax credit, will shrink the tax base and won’t drive growth. Most carve-outs are counter-productive, Mr. Laffer says, though in his view the tax exclusion for overtime could juice output at the margin and thereby offset any revenue loss. Overall, he believes the bill’s pro-growth provisions—renewing the 2017 law’s lower marginal rates and bonus depreciation for business investment will create “economic prosperity like you’ve never seen”—especially if they’re combined with sound monetary policies and deregulation.

“I just now want to be able to live to be 100,” he says. “I just want to see this glorious period that’s coming.”

Ms. Finley is a member of the Journal’s editorial board.