Arab Muslim polymath Ibn Khaldun’s supply-side economic theory that tax cuts stimulate the economy and generate greater revenues influenced Ronald Reagan’s economic policies, and the Laffer Curve, which shaped modern conservative tax policy
In the 1970s, inflation, high unemployment, and stagnant consumer demand plagued the United States (US) economy. Federal Reserve Chairman Paul Volcker reduced the money supply to address the stagflation, causing what came to be known as the ‘Volcker Shock’. The economy, reeling from the shock, helped President Ronald Reagan get elected in January 1981. As Reagan took office, he prioritized ending the crisis by lowering taxes and deregulating.
Reagan’s policy, rooted in supply-side economics, created incentives for goods and services by lowering tax rates. In October 1981, Reagan, a conservative, emphasized the difference between cutting rates and reducing tax revenues to explain his tax cut proposal. He elaborated on the distinction, citing the 14th-century Arab Muslim polymath Abd al-Rahman Ibn Khaldun’s (1332-1406) principle that lowering taxes helps the economy by incentivizing people to undertake business.
Reagan based many of his policies on Ibn Khaldun’s supply-side economic theory, which holds that tax cuts stimulate the economy and generate greater tax revenues. His references to Ibn Khaldun during his presidency sound extraordinary now against the backdrop of conservatives being the main purveyors of Islamophobia and anti-Muslim hate speech.
Ibn Khaldun and Conservative Tax Policy
The conservatives often reject Muslim contributions to civilisation, even as Muslims have played a pivotal role in it as inventors, scientists, and philosophers such as Ibn Khaldun. Ibn Khaldun, who lived in Algeria, Morocco, Al-Andalus (Muslim-ruled Spain), and Egypt, influenced conservative tax policy centuries after his birth in Tunisia.
In 1974, American economist Arthur Laffer reformulated Ibn Khaldun’s idea through the Laffer Curve. He drew the curve on a napkin at a bar meeting with the Nixon administration officials Dick Cheney and Donald Rumsfeld, whose ‘sinister machinations‘ would be blamed for George W Bush’s militarization of the post-9/11 ‘anti-Muslim zeitgeist’. The Laffer Curve underpinned a generation of Republican economic policymaking. Laffer acknowledged that Ibn Khaldun inspired him in developing the Laffer Curve.
The Laffer Curve influenced legislation for lowering taxes to encourage economic growth and investment through the Economic Recovery Act of 1981, based on the idea that benefits to high earners would trickle down. It changed the view of taxation when the highest marginal rate was 70% in the US. Laffer argued that doubling the tax rate does not double the revenues. Laffer underlined that higher taxes disincentivize people from working. He bolstered the idea of low taxes globally, with Reagan dropping the marginal tax rate to 28%.
Mustafa Akyol writes that Ibn Khaldun’s economic insights included the benefits of the division of labour, the law of supply and demand, and the harms of state involvement in trade and production. Ibn Khaldun called property rights a fundamental prerequisite and warned that civilization collapses when they are not protected. Ibn Khaldun argued that attacks on people’s property remove the incentive to acquire and gain property.
Ibn Khaldun wrote that people no longer make efforts to acquire property when the incentive to do so is gone. He explained that people have the energy and desire to do things when tax assessments and imposts upon them are low. Ibn Khaldun noted that cultural enterprises grow under these circumstances, whereas higher taxes to finance opulent palaces or large armies had the opposite effect. He argued that tax revenue decreases when entrepreneurs lose hope and refrain from business as they compare expenditures and taxes with their income and gain, and see the little profit they make.
Sociology, Historiography Progenitor
Ibn Khaldun’s groundbreaking contributions extended beyond economics. A prominent figure during the Islamic Golden Age (8th-13th century), he made significant contributions to sociology, historiography, and political science. Ibn Khaldun founded the science of human society or social organization, devised a new methodology for history, and the causation of events.
Some of the 19th-century European thinkers impressed by his works hailed Ibn Khaldun as the progenitor of sociology and modern historiography. Ibn Khaldun is known as the greatest Arab intellectual and among the world’s great minds. Yale University Professor Franz Rosenthal, who translated the polymath’s writings, concluded that Ibn Khaldun’s most important contribution was treating history as a science, incorporating politics, sociology, economics, and geography.
The Era of Ideas
The Islamic Golden Age was an era of ideas. Nima Sanandaji, the author of The Birthplace of Capitalism: The Middle East, has argued that many of the ideas associated with Western free-market thinkers originated in the Muslim world during the Golden Age, marked by scientific, economic, and cultural achievements at par with the advancements of the Persia and Byzantium high cultures. Sanandaji wrote that limited taxation was the norm during the Golden Age, and the state had a role in funding infrastructure and welfare, but with a minimal approach.
In the book A Companion to the History of Economic Thought, Hamid S Hosseini argues that medieval Muslim writers held a more favourable view of economic activity and wealth accumulation than Christian thinkers. Tenth-century Muslim scholar Al-Mawardi argued that a state should only consider public borrowing as a last resort and in rare cases.
Eighth-century Abbasid judge Abu Yusuf wrote a treatise on taxation and fiscal problems. He argued that projects whose benefit is general should be financed through public revenues, and those benefiting specific groups should be part of public expenditure and funded by the particular group. Yusuf applied cost-benefit analysis to recommend the cancellation of any canal digging where the damages are higher than the benefits.
Civilization And Free Markets
Ibn Khaldun was a prominent supporter of low taxes. He believed that a just government should impose low taxes to stimulate business activity, create wealth, and make it possible to collect more taxes. Ibn Khaldun warned, ‘civilization slumps, and everything decays’ when free markets generating wealth are suffocated.
Ibn Khaldun explained that a bloated government with an eroded tax base would often implode under its weight, leading to chaos and the rise of a new state. Arthur Laffer built on the work of Ibn Khaldun and questioned high-tax policies. He warned of the damaging effects of high taxation, government attempts to control market exchange, lack of respect for private property, and public debt.
The Greatest Work
Ibn Khaldun, whose ideas often seemed to anticipate developments by centuries, is best known for his seven-volume Kitab-ul Ibar (Book of Lessons) and its first volume, Muqaddimah (Introduction). British historian Arnold Toynbee described the Muqaddimah, examining the rise and decline of societies, as the greatest work of its kind that any mind has ever yet created in any time or place. Muqaddimah covers themes including how asabiyya (group solidarity) can help nomads conquer a civilization, turn into what they conquered, and become prey to new nomads, creating a cyclical pattern of history. Muqaddimah argued that the rise and fall of human societies may be traced to specific and discoverable causes.
For Robert Irwin, the author of Ibn Khaldun’s intellectual biography, the scope of the Muqaddimah is enormous and nothing less than the study of the principles of how to do history. Irwin argues that there is much more in Muqaddimah than the explanation of the cyclical rise and fall of dynasties. An encyclopaedic guide to all knowledge as it existed in the 14th century, Muqaddimah discusses music, Berber literature, pedagogy, economics, and the occult.
Irwin concluded that Muqaddima, described as the most important study of history ever produced in the Islamic world, was a startlingly original analysis. Works like these were common in the Arab world, but no one before Ibn Khaldun, noted Sameer Rahim in the British magazine Prospect, developed such an advanced theory about the rise and fall of civilisations.
