Arthur Betz Laffer
14, 1940, Youngstown, Ohio, U.S.
in full Arthur Betz Laffer American economist who propounded the idea that lowering tax rates could result in higher revenues. His theory on taxes influenced U.S. economic policy in the 1980s.
Laffer studied economics at Yale University (B.A., 1963) and international economics at Stanford University (M.B.A., 1965; Ph.D., 1972). As chief economist for the Office of Management and Budget (1970–72), Laffer attracted attention for his supply-side economic theories, which held that reductions in federal taxes on businesses and individuals would lead to increased economic growth and in the long run to increased government revenue.
Laffer drew the famous Laffer curve, which showed that starting from a zero tax rate, increases in tax rates will increase the government's tax revenue; at some point, however, when the rates become high enough, further increases in tax rates will decrease revenue. This occurs because higher tax rates become strong disincentives against earning (and/or declaring) taxable income. Cuts in marginal tax rates could therefore increase tax revenues. Laffer's point was already well known to economists in public finance, but they treated it as an intellectual curiosity. In the late 1970s, Laffer was the first economist to emphasize its possible application to the U.S. income tax system.
The real controversy concerned where the American economy in the 1980s should be located on the Laffer curve. Laffer believed that conditions were right for cuts in tax rates that he predicted would increase tax revenues. He turned out to be wrong about the U.S. economy as a whole but right about a small group of Americans earning more than $200,000 a year and paying, at the time he wrote, a top marginal tax rate of between 50 and 70 percent. Whereas economists before Laffer had ignored the effect of high tax rates on the incentive to earn taxable income, Laffer's emphasis, and the evidence subsequently gathered by others, caused the economists to treat the incentive effect of taxes more seriously than they had. President Ronald Reagan was thought to have based his 1981 economic plan on the idea that cuts in marginal tax rates would increase tax revenues. Reagan's economists projected a large revenue loss from his tax cuts, but they too were wrong: the actual revenue loss was less than had been projected, largely because the cuts in tax rates gave individuals an incentive to earn more taxable income.
Laffer worked as a political consultant while teaching at the University of Chicago (1974–76), the University of Southern California (1976–84), and Pepperdine University (1984–87). He also served as a consultant to the U.S. Treasury and Defense departments (1972–77) and as an economic policy adviser to President Reagan. In 1986 in California Laffer made an unsuccessful attempt for a seat in the U.S. Senate. Laffer is the founder and chairman of Laffer Associates, a San Diego-based economics consulting firm.