The Flinchum File

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A theory for all seasons . . . ?

Years ago in Dallas, I enjoyed having lunch with Arthur Laffer. Although an economic advisor to President Reagan, he is best known as the father of the Laffer Curve, which showed why a cut in taxes increases revenue to the government. This is the basic principal of Supply-side economics.

He had studied the Kennedy Tax Cut, which passed in 1964, and saw how revenues to the Federal government actually increased after cutting the tax rate. Laffer then successfully encouraged Reagan to cut tax rates, and once again, revenues to the Federal government increased. President Trump reasonably expected the Trump tax cut to do the same – to stimulate the economy. There was some modest improvement from the Trump tax cut, but combined with the pandemic-related spending, the national debt exploded. (I was disappointed that Laffer encouraged that tax cut.) Today, our national debt is almost $34 trillion (124% of GDP) and rising rapidly.

I learned a great deal from Laffer and believe there is much truth to his theory. However, a tax cut is not good in all economic conditions. Our economy is strong now, so strong the Fed has had trouble slowing it down! Inflation is falling and unemployment is below 4%. This is not the time for a tax cut. It is time for a debt cut.

It’s a pity Republicans and Democrats cannot negotiate on taxes nor entitlements. A little compromise by both would be a blessing for our grandchildren . . .