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Falling Over the Fiscal Cliff

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    Inventor of the “Laffer Curve” Art Laffer gives his predictions on fiscal cliff negotiations.

  • Duration 8:09
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Is the father of supply side economics and the creator of the Laffer Curve.

Doctor art Laffer I wanna start with ask you about fiscal cliff agreements Republicans Democrats have observed their own issues and her own ideas.

But but an agreement does that.

There's really -- we've had agreements of of debt ceiling agreements and I don't see anything changing anywhere.

I don't either in fact if you look at the fiscal cliff as they call it that I really caught tax would get.

People have already shift of a lot of income out of 2013.

Tom in the 2012.

That's already happened so a lot of the consequences of the fiscal -- -- already bear and what you're gonna see is this year looks a lot better than it should.

And next year will look a lot worse than it should the exact same thing happened in 20102011.

Even though they came to a full agreement to extend all the tax cuts is still at a huge drop in output employment and production.

In the first half of 2011 from 2000.

I -- from 2011 and 2010.

And and that's exactly what's gonna happen here as well why -- for a very bad 2013.

I'm glad you brought that up because this -- been my contention -- that we keep getting these false starts and everybody keeps getting excited about it and rightfully so we all wanna see the economy grow.

But you but you're thinking it I I thought it was 201011.

And twelve all of them have the same pattern kind of a nice start than -- -- Peters out it.

Yet dead and you know 2010 the last half of the year the economy grew at a little over 3%.

In 2011.

The first half of the year the economy grew at less than 1%.

That's exactly the type of shifting of income we're gonna see happening this time.

And you're gonna have a rough 2013.

And it's already baked into the -- -- no matter what.

Washington does.

That's already done.

Well and and the this brings up the question about fiscal cliff is one thing but but the other things that I I've won him -- about as you've got sequestration.

You've got -- -- debt ceiling limitation coming up here in a few more another month or so.

-- and and these are and then -- the big one to me is.

That Dave Camp to head of ways and means the Republican charge it ways -- means and the president everybody's talking about we wanna brand.

Tax reform -- every time I've seen any sort of major tax reform.

Everybody goes into their turtle shell and waits until congress system which will again slow down the economy.

Yeah I I'm very worried about a grand compromise right now now when we give it 1986.

Which of the tax reform act of 1986 it was grand it was wonderful we dropped the highest rate from 50% to 28% Tom.

And we expanded the base we reduced the number brackets from fourteen to four somebody three.

I -- it was a beautiful thing all the Democrats voted with Reagan on this and we created additional prosperity.

That's not gonna happen with President Obama Geithner and Bernanke and that crew in there is just not gonna happen so.

If there is a grand compromise I would be willing to bet you anything.

That camp and the Republicans.

Really get the short end of the stick -- they really get hurt in the process.

I understand the differences dead Ronald Reagan president and -- -- president out -- -- my totally different views about how to how to run the economy.

But that you said the Democrats went along with -- how did Reagan convinced the Democrats to go along with that then.

But because they knew they were wrong.

They know that high marginal tax rates on job creators destroys jobs -- would note that you can't tax and Connie made in this prosperity.

There's not one Democrat today seriously who would run his or her family the way they suggest we run the country.

There's not one Democrat that they were -- own family business or her own family business the way they propose running -- with the government.

They know they're wrong on this issue but they have the political power to force a bad solution and that's what they're doing unfortunate happens all the time.

Well and but but that's exactly right they have the political power and that's why we're getting these stories over and over and over again exactly up from from members of the Republican Party or even Republican pundits like Bill Kristol -- -- All right go ahead raise the taxes and there are some people that think.

This is a political strategy is to say let's go ahead.

Give them their tax increases and then yeah let them all that but the but the problem I have this this big problem art which is I believe in the business cycle.

And -- the business cycle which has been really bad for a long time starts to improve people's say -- eight raising taxes.

Does help.

I wouldn't worry about that Tom seriously -- on this issue.

But the question is the Republicans will appear obstinate and obstructionist if they don't allow the debt ceiling to go through.

If they don't allow some form of the lower tax cuts to be extended without them being extend -- for the highest income -- The Republicans are reading in the corner and they have very little power in the plant in the and in the negotiations today so.

What -- you and I wish would happen I think what we're gonna see is we're not gonna see the debt ceiling used as a major political leverage point by the Republicans and I think you're gonna see the highest tax rates go up.

I think you're going to see that.

Because it's really hard for the Republicans to to withstand the pressure being obstructionist in this case yet but one of the I think unfortunately.

Going back to 9086 I remember the 86 reform act.

It did -- lowered it lowered rates but it also took away a lot of deductions.

Now that's what -- should do yes so now if they do the opposite basically lead the deductions in there.

And they raised the rates my question -- -- what they're thinking they're gonna raise.

Roughly a hundred billion more a year Barton -- -- from the -- are they gonna get a hundred billion.

Now they won't get that Warren Buffett -- all of his wealth and unrealized capital gains which is taxed at zero.

He knows how to play the tax system all the high income earners do.

And what you raise tax rates they just hire lawyers accountants and deferred income specialist and you're gonna get less money from.

You are gonna get less -- look what happen to Britain look what's happening in France look what's happened every time we've had major increases in rates.

You find people not paying their taxes by finding loopholes and -- -- getting around them.

At every windows that troop plus you have a recession.

You know if you're just looking at the revenues from the rich that's one thing but the rich employ all these other people as well you're gonna lose all the tax revenues from them as well.

So it's ready to catch 22 would.

I don't know why the Democrats want to play this card as hard as they do but but they do when they're playing -- that I think they're gonna continue playing.

But here's here's the problem even if they do -- let's assume for sake of conversation they get a hundred billion dollars more from raising the taxes on the -- What we were spending a trillion more of them were bringing an end that's not how -- you gonna get the other 900 billion this if.

-- and you know you're gonna have to rate they're gonna try to raise taxes on the middle and lower income people.

Payroll taxes whatever its gonna be they're going to raise taxes if they want to solve this with a revenue.

The obvious answer that you and I would agree with -- as they should cut spending.

I mean you know I have never heard of a poor person spending himself and the -- -- just doesn't make yeah accent but here but candidate that's that this what trying to go.

But but -- that if you.

If you don't raise the tax rates on the individuals so the president can try and keep his promise about I did not raise your taxes sort of thing.

Below 250000.

But there were already floating balloons as -- -- -- about maybe the mortgage deduction will go away.

Maybe charitable deductions will go away -- is that how they're gonna do what is by lower undertaken away deductions for the middle class.

Or short what they take away from the middle class had the upper class but frankly yeah they're gonna do that they're gonna try to broaden the base and raise rates.

I mean when you try to solve a fiscal crisis as we have.

With taxes you're -- -- create an economic economy of despair.

And that's exactly the direction they're going they're raising rates yeah they're going to broaden the base and that's a deadly combination.

Thank you can't tax and economy of the prosperity it just doesn't happen in economics -- Yeah and you'll see in 2013.

Unfortunately you everyone else will seek to -- -- be hurt will.

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