BusinessTN

In 1980, Arthur B. Laffer Sr. drew a parabolic curve on a napkin, an unprepossessing arc demonstrating that lower tax rates don’t mean declining tax revenue.

Now, some twenty-odd years later, Arthur B. Laffer Jr., his father’s namesake and president of AB Laffer/VA Cato Associates, has moved himself and several employees of his institutional economic consulting firm to Nashville.

Laffer is a poster child for the supply-side economics that his firm and his famous father espouse. To wit: a government’s tax policies affect the behavior of its citizenry. For Laffer, California’s large tax burden and relatively high income tax rates were too onerous, so he moved to a state without an income tax.

From its Midstate office, Laffer’s con- sulting business advises clients about the economic effects of government policies. Yet, the supply-side theory that is his stock in trade has been off the front business pages for years, just like other theories that once held the investing public in sway—monetarism, for example. So, does that mean supply-side ideas are no longer taken seriously?

In fact, supply-side has become a part of economic dogma. Even a long-time critic of the theory like Bill Fox, professor of economics and director of the Center for Business and Economic Research at the University of Tennessee in Knoxville, admits the validity of its basic point. “We all need to be reminded of the truth behind supply-side—a high tax rate is a disincentive to work,” he says.

Vanderbilt University economics professor Greg Huffman in Nashville agrees, saying that supply-side has won the larger battle by bringing down rates to a moderate level, though it may not succeed in decreasing rates further: “In 1960, when the top marginal rate was 91%, cutting the tax rate was pretty clearly an incentive. When the rates are already down to 35%, a cut doesn’t mean the same thing,” he says. So, academicians will argue about where we are on the famous curve.

And Fox asserts that lower taxes may not stimulate enough growth to be revenue-neutral. At a 35% tax rate, a dollar cut from tax revenues must generate almost three dollars in growth lest the government lose revenue. “That doesn’t seem likely,” he says, “especially when the taxpayer’s extra dollar means one less for the government.”

Still, Laffer defends the pump-priming effects of lower tax rates with an anecdote: “If someone borrows money to begin a new business, is that good or bad?” he asks. And maybe that’s the problem. Not the anecdotal evidence but the difficulty of knowing for sure.

For better or worse, the nation’s economy is, at any single moment, a roux of conflicting forces. So economists don’t have the luxury of control groups and extensive double-blind testing. Instead, devotees of various economic schools are free to pick and choose among the data that suit them—and their theories.

Nevertheless, since its debut in the early years of the Reagan administration, supply side has passed from bad boy outsider to a guardedly accepted member of the academy.

And, as for Arthur Laffer Jr., newly adopted son of Tennessee, he is quick to move past Tennessee’s tax structure and praise the state’s quality-of-life advantages. He even can bear the state’s very high sales tax, while remaining mindful of its consequences: “Is it surprising that the state also is one of the top five in per-capita Internet purchases?” Like water seeking its own level, taxpayers will seek to avoid taxes.

None more so than Laffer himself. For all his affection for the Volunteer State, he concedes that his love is conditional: “If Tennessee enacts an income tax, we’ll move to Texas.”