The Laffer Era

I won’t presume to speak for “Ready for Hillary,” but it’s a fair guess that they hope to face Jeb Bush because Democrats believe they hold the ultimate trump card which has nothing to do with his name. It is “the 90’s.” The Clinton campaign is convinced that in a matchup with Bush, all they need do is trumpet the “Clinton economy” while decrying the “Bush economy.”

To borrow from Lee Corso, “not so fast.”

Let’s acknowledge that Jeb Bush is not George W. Bush and Hillary Clinton is not Bill Clinton. The odds of President Hillary pronouncing “the era of big government over” or signing a signature welfare reform are as remote as President Jeb Bush championing a new extension of Medicare or proclaiming “deficits don’t matter.” Still, it is inevitable that in a Clinton-Bush race the comparison between Bill Clinton and George W. Bush will be broadly accepted as fair. Team Clinton believes they hold an unassailable advantage because they act like Bill Clinton was the sole progenitor of the 90’s economy.

Now comes their bete noir Rand Paul poking holes in the myth. Speaking at a Lincoln Labs conference in Washington last week, Paul said “when we dramatically lowered tax rates in the ’80s, we got an enormous boom in our country, probably for two decades. Many of us believe that the ’80s and the ’90s, once the boom began, had a lot to do with lowering the tax rates.” With that explicit challenge to conventional liberal wisdom, Paul turned the comparison between the 90’s and the 00’s into a debate on whether the 90’s were really just a continuation of the 80’s.

Cue the long knives.

Jonathan Chait waded into the breach to rebut this claim, arguing in New York that “tax rates on the rich, at least at current levels, have little impact on economic growth.” Note the qualifier at least at current levels. Liberal discussion of the 90’s focuses on Clinton raising the top rate to 39.6% from 31% to the economy’s great benefit. This casually omits how Reagan reduced the top rate from to 50% from 70% and ultimately to 28% with the 1986 tax reform.

Another tactic used against Reagan is that he was a serial tax raiser who saw the light after the 1982 recession proved his initial rate reductions had failed. “For example, when Reagan cut taxes, economic conditions deteriorated thanks to high interest rates. When Reagan realized he’d cut taxes too much and reversed course, raising taxes seven of the eight years he was in office, the economy improved,” says Steve Benen of MSNBC, who can be forgiven for his ignorance due to being Rachel Maddow’s petulant blogger. The left never seem to grasp that not all taxes are created equal. For every minor increase in a payroll tax or specific targeted tax, Reagan’s legacy is indisputably as an historic tax cutter, as the tax rate that matters most for economic growth and capital investment is the top marginal rate. Investors invest in enterprises when they believe the return on their investments will bear returns sufficient to justify the risk. More capital is risked when greater returns are in the offing. When top marginal rates are high there is less incentive to invest.

The adage “capital goes where it is welcome” is a fundamental truth akin to the laws of physics. Reagan’s success in bringing down top marginal rates are, more than any other external or mitigating factor, the primary reason for the 25 year secular growth trend between 1982-2007. The dramatic rate reduction heralded a new era of entrepreneurial optimism and capital investment as individuals responded to incentives brought about by a more welcoming capital landscape. Yes, one consequence of this was that the rich got richer, but the boom in middle class standards of living as well as upward mobility (an entire new class, the “upper middle” owes its existence to this period) in the 80’s and 90’s was a straight line continuum, putting the lie to the myth that things were sour under Reagan and H.W. Bush until Clinton arrived to save the day with moderate increases in top rates. Any honest appraisal of this era must account for the steady gains in GDP, employment and overall consumer confidence which contributed to multiple quarters of 6% and 7% growth during both the 80’s and 90’s.

Because Bill Clinton did very little to reverse the Reagan revolution on taxes, and in fact bolstered it by lowering investment rates while increasing the top marginal rate nowhere near in proportion to the level that Reagan lowered it, any comparison of the 80’s and 90’s is ultimately moot. We might as well call it “the Laffer era.”

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