I’m delighted to announce the launch of my new podcast and newsletter Reality Check. In each episode I’ll cut through the spin and explain the numbers behind the noise. For the first installment I sat down with the American economist Arthur Laffer.
‘Course you would,’ is not the answer I expect when I ask tax-cutting American economist Arthur Laffer if he’d break manifesto promises and raise the big three taxes – income tax, national insurance and VAT – if he were in Rachel Reeves’s shoes.
It’s an astonishing remark from the man who built his reputation preaching the gospel of low taxes. Britain’s finances, it seems, are now so dire that even Arthur Laffer – probably the world’s most famous living economist – appears to think the Chancellor should put up her main taxes.
I’m so surprised I ask him again – just to check I’ve not misheard. This time comes the caveat: ‘That’s only if you want to raise taxes at all… but she shouldn’t. She should cut them, especially on the rich.’ He’s back on familiar ground.
Laffer found fame advising the Reagan administration and sketching the tax rate to tax revenue curve which now bears his name, but which he credits John Maynard Keynes with ‘most beautifully describing’. The curve makes the simple point that there comes a tax rate so punitive that it reduces revenues by driving avoidance and discouraging work.
Only one aspect of the Laffer curve has changed since it was first drawn – famously on a napkin – all those years ago. Today, Laffer draws it with the tax rate on the x-axis, unlike the original which had it on the y-axis. Why, I ask him, did alter the curve? ‘Have you ever taught a class? Well, let me just say that when the young men in the class see the curve like that, they never forget it.’ Who would’ve guessed the most famous curve in economics is based on a woman’s breast?
Laffer is in London this week to launch a new book, Prosperity Through Growth, but also, it seems, because he has a genuine love of Britain and what it’s given the world. ‘This is the land of the industrial revolution,’ he says. ‘The land of Adam Smith and David Ricardo. The land of entrepreneurs. Capitalism! If you’re up in Scotland, you know, all the Presbyterians: “We’re capitalists! We’re a religion!” This is the country that discovered the modern world.’ It’s music to my Protestant Scots ears.
Sadly though, for fiscal conservatives, Laffer’s low-tax proselytising is more ignored than ever. Reeves looks set to aim fresh tax rises at the wealthy – even after her non-dom reforms saw an estimated 16,500 leave the country and take their contributions with them – with a £2 billion raid on lawyers, GPs and accountants now planned.
Laffer says much of the damage to the economy is already already done. ‘Of course it’s lost its way. It’s really terrible. You need a big shake-up, break some of the furniture, break some of the china. You’ve destroyed the prosperity. If you look at Britain’s GDP as a share of the world, 50 years ago it was high. It’s gone way, way down. You are disappearing.’
Taxing the rich, he insists, is squarely to blame for much of that decline. ‘Every single time we’ve raised the highest tax rate on the rich in the US, the economy has underperformed, tax revenues have gone down and the poor have been hammered. Every single time we’ve lowered them, the opposite has happened.’
But none of that depresses Laffer. When we meet he’s come straight off a plane from Heathrow, and is in a jubilant mood. Much of the warm up to the interview he spends affectionately taking the piss out of my Scottish accent. ‘Ahh you’re basically English then,’ he says when I tell him I’m from Edinburgh.
His good mood extends to the US economy too. ‘I’m not disheartened,’ he declares. ‘In 1944, the highest marginal income tax rate in America was 94 per cent. Today it’s 37 per cent. We’ve got cleaner waters. We have cleaner air. We’re making huge progress. We’re kicking the living bejeebers out of the left wingers.’ He wants the same over here: ‘All I want to do is bring a little optimism to Britain. You guys deserve the very best this world is. You led us all into free market, democratic, pro-growth capitalism. You did. Thank you.’
Laffer insists he’s non-partisan these days, and has a good word for almost everyone. ‘Rachel Reeves and Mel Stride, they’re all Britishers. You’re all in the same tub,’ he says. ‘When I look at the Chancellor of the Exchequer today, she seems like a very nice lady who wholeheartedly wants to help Britain. She just doesn’t understand that raising tax rates on the rich will hurt the British Isles – will hurt the poor people. It will lower revenues, cause the economy to stagnate, and kill the poor, the minorities, the disenfranchised. That’s not a winning model.’
And on Stride, the shadow chancellor, who visited him recently at his home in Nashville, Tennessee, Laffer is equally warm. ‘Mel’s not one of us, my people kept saying. But I really found that he was.’
‘I told Trump once: “Sir, anyone who imports two foreign wives has to be a free trader.”’
Does the same apply to Nigel Farage and Reform, which mixes right-wing rhetoric with left-wing economics? ‘Don’t criticise’ the bad positions, Laffer tells me. ‘Nudge them toward the good ones. An acorn doesn’t look like a 300-year-old oak tree yet.’ He’s clear that Farage, who he says he knows well, is bracing himself for a fiscally conservative lurch. Only recently, the Reform leader disowned his party’s manifesto commitment to make £90 billion worth of tax cuts; it seems Laffer could well be right.
Where he does have ire, it’s for central banks. ‘There shouldn’t be a Bank of England,’ he says. ‘The reason you have cryptocurrencies coming in, you have the stablecoins, you have Bitcoin, you have all these other things coming, it’s because of the lousy money system. And the private sector is trying to recreate a monetary system around it. If you don’t straighten up the British pound, and if we don’t straighten up the US dollar, the private sector will create a new money that will take over all of that. And so they should.’
When we move on to Donald Trump, who Laffer has advised in both his first and second presidencies, his arguments begin to slightly break down. How can you truly support free markets, I ask, when Trump has brought in tariffs which are the largest tax hikes on Americans for decades? ‘Take Donald Trump very seriously, but don’t take him literally,’ Laffer replies. ‘He’s a free trader. Every CEO of an international company is.’
Then, with a grin: ‘I even told him once, “Sir, anyone who imports two foreign wives has to be a free-trader. He didn’t laugh.”’
Laffer insists Trump’s tariff threats are a negotiating tactic, not protectionism: ‘He used them to get other countries to lower theirs. Every one of his trade deals – Japan, South Korea, Brazil – led to more free trade, not less.’ Whether you buy that argument or not, he makes it with the same zeal he applies to everything.
The message Laffer wants to deliver this week is simple, relentless and, whether you agree or not, uplifting: Britain, he says, can still fly ‘to the moon and the stars’, if only it remembers how.
Watch the full episode of Reality Check here.
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