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’ s what I ’ d like to see: a real fl at tax, Jerry Brown ’ s fl at tax, that 13 percent fl at tax. Do you remember that one in 1992? That is the perfect tax code for the U.S. economy. You get rid of all federal taxes except for the sin taxes and, in their stead, have two fl at - rate taxes. No deductions, no exemptions. Implement a fl at tax on personal unadjusted gross income and a fl at tax on business net sales. If you did that with the static revenue situation, you would be able to collect enough revenue — no Laffer curve in this one — to match all federal revenues with a tax rate of about 11 percent on each. That ’ s what you really need to do today to make sure you do the least damage with your taxes.

Q: Is it correct that you moved to Nashville because of the tax situation?

Arthur Laffer: That ’ s true, I did. Taxes were a very important part of my consideration. As a Californian, my highest marginal tax rate was 10.3 percent and, with the problems with the alternative minimum tax, it probably won ’ t be deductible for very long. Here in Tennessee, there is no state income tax at all. You don ’ t have a preferred item that you ’ re deducting, and therefore, you don ’ t even come close to your AMT, either. It ’ s a great place to live: great housing and great people. Not that California isn ’ t terrifi c — it is, but it ’ s really fun here.

Q: Can you talk about David Walker? He and Paul Volcker think that the political system is broken, because you have the people who want to cut spending on one side and the people who want to raise taxes on the other side.

Arthur Laffer: The Concord Coalition. I ’ m not a member of it, and I do disagree with it when they talk about raising taxes, but the Concord Coalition is completely correct on wanting to control government spending. If the Concord Coalition, with Walker and Volcker, were to be able to be successful and get rid of all of this pork, it would be spectacular.

Would you like my solution? Whether you like it or not, I ’ m going to tell you. If a congressman or a senator does something that c17.indd 237

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Interviews

causes harm to the United States, what happens to that person ’ s salary? Nothing. If a congressman or a senator does something that promotes economic growth and prosperity and a bull market, what happens to that congressman or senator ’ s salary?

Nothing. It makes no sense whatsoever that, no matter how these people behave, their compensation is unrelated. We need to do what corporate America does. If you saw two companies, exactly identical, and Company One had a CEO who had no stock options, owned no stock, and was paid a fi xed salary, and Company Two had a CEO with a very small salary and a lot of stock options, which company would you prefer to invest in?

Of course you want to invest where the people who make the decisions are incentivized to make good decisions. I want to put Washington, D.C., on commission.

Let me give you a hypothetical. Let ’ s say that you elect a new congressman, a new senator. The day he or she takes offi ce, you give that person $ 5 million worth of stock. He or she is allowed to keep all the capital gains, tax - free, and is held personally liable for all the capital losses. I guarantee you these people would vote differently. The reason that you have these misdirected policies by these silly politicians is they are not incentivized to vote in the correct way. If you told them that their salary would grow dramatically if the stock market or the economy performed, they ’ d never go for these stupid policies they vote for. They ’ d never go for these pork barrels. They ’ d never go for this pay/go stuff. They ’ d do what was right for America. But the reason they don ’ t do what ’ s right for America is there ’ s nothing in it for them.

Q: I haven ’ t heard that idea. Did you make that up?

Arthur Laffer: That ’ s what I ’ ve been doing for 30 years. That ’ s the ultimate supply side. No other supply - side reform would be necessary if you did that one.

Q: What ’ s the story about the H