Tax History: Art Laffer’s History of Taxes Is Really a History of Rates

Donald Trump likes this book.

For many potential readers, that is probably all they want to know about Taxes Have Consequences, a new book claiming to provide “an income tax history of the United States.”

But what readers should know about this book is something else: It isn’t really a history of the income tax in America. Rather, it’s a sustained argument for contemporary tax reduction, buttressed by historical evidence and unconventional interpretation.

As a policy brief, it does what it needs to do. As history, it’s unconvincing.

Egg in Your Beer

It’s impossible to write about this book without taking stock of Trump’s contribution: He wrote the foreword, which focuses heavily (and characteristically) on his own accomplishments. He starts, however, with a nod to the authors.

“People need to understand how the economy really works, not how some professor wishes it would work,” Trump writes. “In this book, you do have three Ph.D.s who do understand, and upon whom I have relied.”

This appears to be a compliment of some sort, directed at the three authors of Taxes Have Consequences: Arthur B. Laffer, Brian Domitrovic, and Jeanne Cairns Sinquefield. It’s a little hard to parse, like many of Trump’s statements. But he seems to like these people, despite their advanced degrees.

And more to the point, Trump likes the book. He endorses its “logic, theory, and underlying statistical analysis,” which mirrors the reasoning behind his own signature fiscal achievement, the Tax Cuts and Jobs Act of 2017. Trump then delivers a protracted celebration of the TCJA, concluding with a charming rhetorical throwback to underscore his achievement: “How’s that for egg in your beer?”

Pretty good, I guess?

The Curve of History

It makes sense that Trump’s contribution treats history as little more than prologue for the 2017 tax law: The entire book shares this instrumental view of the past.

The first clue can be found in its structure. The first two substantive chapters aren’t really about history at all, but about theoretical aspects of the income tax, various tax avoidance schemes, and Laffer’s eponymous curve. (Laffer famously sketched the curve on a napkin over dinner in 1974. A curve-bearing napkin is now held by the Smithsonian Institution, but it appears to be a reproduction of the original.)

The book begins, in other words, with its conclusions and then mines the historical record for evidence to support those conclusions. It’s possible to structure a book this way and do it honestly. But it’s also possible to let your conclusions (and ideological commitments) shape your historical analysis.

In Laffer’s case, the history just happens to support a set of ideas that he’s been advancing for half a century. He may well have developed those ideas from his careful reading of the historical record. But he’s put together a suspiciously neat package, one in which all the historical evidence lines up with his favored economic theory.

The Laffer Curve suffuses Laffer’s history of modern America, always at work, always functioning exactly as predicted. For a specific kind of economist, that probably makes sense. For a historian (and a historical economist), that sets off warning bells: History is rarely that predictable.

All About Rates

Taxes Have Consequences claims to be a history of the income tax in the United States, but it’s actually something less ambitious, or at least more focused: a history of income tax rates in the United States. And more specifically, top rates paid by the nation’s richest taxpayers. The authors are unapologetic about this narrow focus. Top rates are the most important rates for shaping the economy’s overall health, they contend. As such, they deserve the closest scrutiny.

The various chapters of Taxes Have Consequences explore rates during key periods, including the 1920s, 1930s, 1940s, and so on. Some of these discussions are particularly interesting, if not especially convincing, including discussions of tax cutting episodes of the 1920s and 1960s. I also appreciated the effort to wrestle with the anomalies of the 1950s, which are generally given short shrift in the literature of fiscal history.

For the sake of brevity, however, I’d like to focus on the book’s discussion of the Great Depression, which illustrates its most puzzling and maddening qualities.

Challenging Consensus

Laffer and his coauthors challenge every leading theory about the root cause of the Great Depression, including (and especially) the dominant monetary explanation. That theory emphasizes a nearly 30 percent decline in the money supply between the fall of 1930 and the winter of 1933. Prices fell by a similar amount, and the deflationary spiral sent the economy into its deadly, protracted tailspin.

The villain in this story is the Federal Reserve. Don’t take my word for it: Former Federal Reserve Chair Ben Bernanke, one of the world’s leading experts on the causes of the Depression, acknowledged as much in 2002.

“Regarding the Great Depression,” he said during a speech to honor the economist Milton Friedman, “we did it. We’re very sorry. We won’t do it again.”

How did the Fed “do it”? Through a “sin of omission,” to lift a phrase from the Fed’s own history of the period. The Federal Reserve might have tried to slow the decrease in the money supply. But when it chose not to act, it condemned the nation to a long period of ruinous deflation. As the official history acknowledges: “This deflation increased debt burdens; distorted economic decision-making; reduced consumption; increased unemployment; and forced banks, firms, and individuals into bankruptcy.”

This interpretation of the Great Depression and its dominant cause is widely accepted by historians of every sort. But Laffer and his coauthors dispute the monetary origins of the crisis. Instead, they blame taxes.

“The connection between tax increases and the Great Depression is clear and easy to show,” they write. “The chief cause of the Great Depression was taxation.”

Tariffs

This tax-centric interpretation of the Depression is enough to warm the heart of any tax historian. But it’s hard to swallow. Let’s start with the authors’ assertion that the Smoot-Hawley tariff started the disaster in motion. “After the tariff bill became law in June 1930, all things unmerciful broke loose,” they write. “The stock market cratered, tax revenue dove, and unemployment soared.”

Their story about the importance of taxation depends a lot on correlation. They chart key events in the congressional consideration of the tariff bill against major moves in the stock market. Old warnings about correlation and causation don’t seem to worry them.

In any case, this view of Smoot-Hawley’s broader effects is not widely shared. “Most economists, both liberal and conservative, doubt that Smoot-Hawley played much of a role in the subsequent contraction,” observed Douglas Irwin in Peddling Protectionism, his well-regarded history of the law. Irwin continued:

Friedman’s word is not law, of course. But his view is certainly the consensus position among economists. Smoot-Hawley was bad. It just wasn’t that bad.

Of course, Laffer and his coauthors don’t argue that the Depression was caused solely by the tariff increase. They also cite the Revenue Act of 1932 as a key factor. That law, enacted during the last year of Herbert Hoover’s presidency with the cooperation of a Democratic majority in the House of Representatives, represented a giant peacetime tax increase.

Policymakers considered the 1932 tax hike a necessity, given the looming shortfall in federal revenues caused by the deepening Depression. In retrospect, that sort of devotion to balanced budgets in the midst of an economic slump seems profoundly foolish — a point that Laffer and his colleagues make repeatedly. But at the time, it was conventional wisdom, embraced by lawmakers and fiscal experts of almost every political stripe.

You wouldn’t know that, however, from reading Taxes Have Consequences. The authors spend little time exploring the ideas and motivations of historical actors. This is a book crafted to pass judgment on the past, using standards developed in the present. It is not a book that tries to understand the past on its own terms, exploring the ideas and experience of people living at the time.

As such, it’s not really a work of history. Or at least not my kind of history. It’s a work of advocacy that uses history (and historical actors) for its object lessons.

Indicting Hoover

Speaking of those historical actors, they get some idiosyncratic treatment in this book. Poor Hoover takes it on the chin again. To be fair, he has it coming; there is almost no way to rescue Hoover from his own failures during the Depression.

But if left-leaning historians chastise Hoover for doing too little in the face of economic calamity, conservatives have decided that he did far too much. Indeed, the new conservative critique tends to see Hoover as the new Roosevelt. In this case, the authors cast his 1932 tax law as a precursor to the big tax hikes of the New Deal era.

Indeed, this revisionist view of Hoover requires that Roosevelt be diminished accordingly. The FDR tax hikes are no longer innovative, but merely a continuation of the Hoover model. Hoover, not FDR, is the real villain in this story, the real statist sinner.

“With one or two notable exceptions, the new Roosevelt administration made no major change in economic policies,” Laffer and company write. “Roosevelt carried on and intensified Hoover’s policies, all while blaming Hoover for the consequences.”

This effort to demonize Hoover and diminish Roosevelt is profoundly unconvincing. To be clear, it is not unique to this book: It can be found in many new conservative histories of the period. But it doesn’t withstand serious scrutiny.

It’s simply implausible to describe the Wealth Tax Act of 1935 and the undistributed profits tax of 1936 as “one or two notable exceptions.” These were major departures from the Hoover tradition. And while neither of these laws appeared at the start of Roosevelt’s presidency, parts were under consideration by FDR’s vaunted “Brains Trust” even during the 1932 campaign.

As Republicans of the 1920s go, Hoover was something of a progressive, which historians have recognized for decades. But he was no New Dealer, as he would make clear once the Depression struck.

All About the Rate Cuts

Ultimately, this is a book about rate cuts — an argument for moving the top bracket income tax rate somewhere south of 20 percent. To bolster the case for such a reduction, it dips its net into a variety of historical periods, coming up with evidence that supports the case for lower rates. Honestly, that’s fine: I’m not grievously offended by the instrumental use of history. It goes on all the time.

But let’s just be clear: This is not a history of income taxes in the United States. It does not provide a comprehensive understanding of how the income tax changed over time, and it does not set the income tax within a broader historical context, at least not in any meaningful sense. It dances lightly over everything that happens outside the rate schedule.

Most frustrating of all, this book makes only the most modest sort of effort to take people seriously. It never explores, in any serious and sympathetic way, what people were thinking. Why did they make the decisions they made? What were they trying to achieve? How did they think the economy worked? How did they choose their allies? And their enemies? Those questions play a role in this analysis. But they get superficial answers that all tend to point in a single, normative direction: toward lower rates.

So read this book. It will tell you things you don’t know. It’s especially helpful around state taxes, which never get enough attention in synthetic histories. But just understand what you are ultimately getting here: a policy brief for rate cuts.