Conservative economist Arthur Laffer rocketed to fame in the 1980s, advising U.S. President Ronald Reagan and United Kingdom Prime Minister Margaret Thatcher on tax policies.
Today Laffer is offering his views
to Ukraine’s Finance Minister Natalie Jaresko.
His Laffer Curve invention – a slope
that shows how the government could actually save by cutting its higher tax
rates – was what ultimately brought Laffer fame in the world of economics.
Laffer is the founder and chairman of Laffer Associates, an investment
research and consulting firm, and advises Republican presidential candidates.
“The pomp, and pageantry, and the
big pictures and the great dinners… that’s not where Ukraine is going to get
its answers,” Laffer told the Kyiv Post in a Skype interview from his office in
Nashville, Tennessee.
Whether it is the U.S., Great
Britain or Ukraine, Laffer looks at five areas when he analyzes countries:
taxes, government spending, monetary policy, trade policy and regulations.
In all of these sectors, Ukraine is
weak compared to its Western neighbors, he said.
“What one wants to do is collect
taxes in a way that does the least damage to the economy,” Laffer, 75, said.
“We tax people who speed on highways to get them to stop speeding. We tax
cigarettes to stop people from smoking. Why on earth do we tax people who earn
income and businesses that employ people or entrepreneurs that invest?”
Post-Soviet economies have generally
performed poorly, with population declines serving as unhealthy indicators.
On average since 1991, about 42,000
people leave Ukraine yearly. “It has one of the lowest birth rates in the world
and one of the highest death rates… and these are very bad indicators about the
future of Ukraine.”
Ukraine is ranked second among
countries with the highest death rates by the U.S. Central Intelligence Agency
World Factbook.
Ukraine’s output production is also
very low relative to other European countries. Ukraine’s $3,083 gross domestic
product per capita in 2014 was about one-eighth of the average European one,
Laffer said.
How the tax system works can bring
prosperity or further plundering, he said.
That’s why he favors going back to
the basics of “having the lowest possible tax rate on the broadest possible tax
base” as the best route to people declaring their incomes and paying their
taxes.
Laffer said there shouldn’t be any
deductions, exemptions or exclusions.
“And Ukraine surely doesn’t want
differential tax rates because… it can be very confusing and people can
arbitrage those tax differences in finding tax loopholes, deductions, credits,”
he said.
At the other end of the spectrum is
liberal Nobel Prize-winning economist Paul Krugman who advocated for having a
progressive tax system that would tax the rich more aggressively and provide
the poor with benefits. Laffer, on the other hand, argues that ideally taxes
should be equal for all income groups.
That’s why he finds Jaresko’s tax
reform package attractive, especially the single tax rate – (of 18 or 20
percent), which would reduce the multiple rates in existence today.
Ukraine should emulate the America
of 1912, a year before the income tax came into effect. “Foreign trade was
the primary source of our federal tax revenues,” he said, with government
spending in America taking only 2.5 percent of gross domestic product while
Ukraine’s now takes up 45 percent.
Another example is China in the
mid-1970s, when 95 percent of its production came from state-owned companies.
That has been cut to 25 percent as private businesses flourish.
Ukraine has little room for
flexibility. Among his radical ideas are to get rid of its central bank and
currency in favor of adopting a hard currency of its choice – whether it’s the
euro, yen or dollar. This would eliminate the unpredictability of the highly
sensitive hryvnia and would be easier for international trade, Laffer argues.
“If Ukraine looks at the value of
its currency, the inflation rate, it does not have a large enough economy to be
able to sustain a world class currency for trade, for domestic reasons,” Laffer
said.
He also believes that Ukraine’s
retirement age should be increased from its current 57 years for women and 60
for men. Ukraine has “got a big pension problem,” considering that social
security makes up more than 30 percent of its state budget. “Ukraine doesn’t
have the money to be able to afford the luxury of paying people not to work,”
Laffer said.
If a nation “bends to the
political world it will lose the economic world, especially if it is Ukraine
because it has very bad politics and even worse economics. And Ukraine cannot
under any circumstances sacrifice the economy for politics… it doesn’t have the
freedom to do that.
“In other words, Ukraine has a
long way to go. It is a very poor country.”
Kyiv Post staff writer Ilya
Timtchenko can be reached at [email protected].
