Arguments Summed Up: The End of Prosperity

Title & Author: The End of Prosperity: How Higher Taxes Will Doom the Economy--If We Let it Happen by Arthur B. Laffer, Stephen Moore, and Peter J. Tanous
Genre: Nonfiction--Economics
My Rating: 9.0

Summed Up:
The malaise of the 1970s was caused by several key economic problems: rampant inflation, high tax rates, a crushing regulatory burden, and runaway government spending. By addressing those problem areas through supply-side economics, Ronald Reagan was able to usher in twenty five years of prosperity. More wealth was created in those twenty-five years than in the previous two hundred.

When economic policies reward growth that is exactly what happens.  Incentives matter. Prosperity doesn’t happen by accident, and growth must be nurtured and rewarded. The key is to stimulate investment, not consumption. High taxes are a major depressant on investment, work, effort, entrepreneurship, and risk. People are more likely to invest, work, and live in areas where they can keep more of their income and more of their returns on investment. High taxes force capitalism to try and succeed without the capital needed for that to happen: capitalism without capital.

However, when politicians get everything wrong—tax policy, regulatory policy, trade policy, monetary policy—they can completely stifle and destroy growth.  Almost always, these disastrous policies are coated in good intentions, e.g. to help the poor, but the result is usually the opposite. For example, liberal Democrats constantly try to raise taxes so the rich pay their “fair share,” but it has been shown that higher tax rates decrease the amount of revenue raised.  I loved this quote: “To us the best form of welfare is still a good high-paying job. There is no alternative to economic growth. And a tax system that destroys jobs and wealth is the most regressive tax of all.” (255)

The authors identify four killers of growth: Trade protectionism; tax increases coupled with profligate government spending; new regulations and increased government intervention in the economy; and monetary policy mistakes. Supply-side theory on the other hand is based on the following: free trade, stable prices and sound money, light and efficient regulation, welfare reform to encourage work, a generous immigration policy, and smaller government.

In regard to taxation, the authors propose a low flat tax where everyone pays the same rate. This flat tax on business and household income would only have to be 12 percent to retain the same amount of government revenue. In fact, but lowering the tax rate and increasing the tax base, revenue would increase because of the increased economic activity sure to follow. This principle follows the idea of the Laffer Curve which shows that increased tax rates decrease government revenue and lower tax rates increase revenue. People work more when there are lower taxes, the incentives to work are higher when people get to keep more of their money, therefore economic production increases and the economy grows creating more wealth to be taxed. For example, Russia, a recent adopter of a flat tax, gets more revenues with a 13 percent flat tax than it did with the old rate of over 50 percent. Around the world, countries have switch to flat taxes and seen not only their collected revenues soar, but their economic output skyrocket as well.

Some critics of supply-side economic policies call it “trickle-down economics” and bemoan an increasing gap between the richest and poorest. The authors point out that this gap is not due to the poor becoming poorer, in fact during these twenty five years the poor have seen their income grow by the highest percent. The gap is due to many Americans becoming fantastically rich. But, this increased wealth did not come at the expense of the poor.

A large portion of the book is dedicated to using historical examples to show how supply-side economic policies have always lead to growth, lower unemployment, and increased quality of living, while Keynesian policies lead to high unemployment, increased poverty, and inflation. The final chapter of the book is an excellent guide to managing your personal investments to weather economic downturns and benefit from periods of growth.

You can read my review of The End of Prosperity here.