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Laffer vs. Zakaria: Who’s Right?

August 2nd, 2010 - 6:21 am

In The Wall Street Journal today, Art Laffer points out the Catch-22 waiting to ambush those who want to raise taxes and “soak the rich.” In brief, soaking the rich is a reliable prescription for socking it to the less well off. “As a result of higher tax rates on those people in the highest tax brackets,” Mr. Laffer points out,

“there will be less employment, output, sales, profits and capital gains—all leading to lower payrolls and lower total tax receipts. There will also be higher unemployment, poverty and lower incomes, all of which require more government spending.”

Oh, that is to say, dear. But then we have Fareed Zakaria at Newsweek with a request I wish I could help fulfill, at least in his case: “Raise My Taxes, Mr. President.”  According to Mr. Zakaria, “The Bush tax cuts remain the single largest cause of America’s structural deficit.”

Gosh. “Structural deficit.” That sounds impressive. How, you might wonder, does a structural deficit differ from the  common or garden variety deficit? Let’s leave that to one side, acknowledging as we do that a “structural deficit” at least sounds more impressive than a deficit without that adjectival honorific.

The question — well, one question —  at issue is whether Fareed Zakaria is right: Are the Bush tax cuts largely responsible for America’s deficit?

I believe the answer is no.  Why? Because, as Art Laffer argues in his column, tax cuts generally have the effect of enhancing revenue, whereas tax increases generally reduce revenue.

This is not a new observation. Mr. Laffer  begins his piece with a quotation from President Kennedy who pointed out half a century ago that “Tax reduction thus sets off a process that can bring gains for everyone, gains won by marshaling resources that would otherwise stand idle—workers without jobs and farm and factory capacity without markets.”

I do not expect that argument to make much of an impression on Fareed Zakaria or anyone else carrying water for the Democratic establishment. Why not? Because the economic effect of reducing taxes is for them a secondary consideration. What matters most to them is the political effect of raising taxes.

It’s all a matter of perspective, of where you sit. Fareed Zakaria begins his column with the observation that

“For the last few months, we have heard powerful, passionate arguments about the need to cut America’s massive budget deficit.”

I think that is one of those statements that is true but misleading, which means that it is false though (partly) accurate. It is misleading because it tells only part of the story. And the part it leaves out is critical. Ask yourself this: where did the deficit come from?  Did a tax cut, the one put in place by President Bush or some other tax cut, cause the deficit. No. Spending more than we took in caused the deficit.  The deficit is a symptom, an objective correlative if you will, of profligate spending.

Spending is the issue. You get a deficit when you spend too much. It’s only by turning the telescope around and looking at things backward that the issue of spending seems miniature.

The larger question here, the political question I referred to a couple of paragraphs back, revolves around the motivation for looking at things in this backward way. Why would people like Fareed Zakaria, Timothy Geithner, Nancy Pelosi, and Barack Obama suddenly discover America’s huge deficit and conclude that the solution to the deficit is to raise taxes on the producing (as distinct from the taking) classes?

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