This is a rush transcript from "Your World," September 29, 2014. This copy may not be in its final form and may be updated.
NEIL CAVUTO, HOST: All right, to Ronald Reagan's top moneyman, Art Laffer, who says what happens in Hong Kong won't stay very long in Hong Kong.
Why not, sir?
ART LAFFER, FORMER WHITE HOUSE ECONOMIC ADVISER: Well, I think this is a whole thing on economics, Neil.
This has been one of the most successful cities ever on Earth. They have got a 15 percent flat tax on income. They have got a 16.5 percent tax on corporate profits. They got have a few other taxes here and there, no tariffs, no quotas, no restrictions.
They are an open-world global city and they don't want to see their government changed by the Chinese government and putting in candidates. So they have a model that really works. And they don't want to lose it. And if I were Chinese in Hong Kong, I would riot, too.
CAVUTO: You know what I'm wondering, though, is how does China deal with this? Because to crack down a la Tiananmen Square in 1989, A, we have the Internet and social media and things we didn't have back then.
CAVUTO: And, B, I mean, you bite the hand that helps feeds the economic giant...
CAVUTO: ... you become, right?
LAFFER: Yes. Well, China, I can't imagine, will really go much further than they have. We need China desperately. They need us desperately. They need the world. Hong Kong is their window to the rest of the world. It really is.
CAVUTO: It's not a pretty window right now.
LAFFER: Well, not today, it's not. It's been a very pretty window for a lot of years, though.
CAVUTO: You think this subsides?
CAVUTO: You think this subsides then?
LAFFER: I do. I do. I think China gives in and lets them have their control of the city. They can pick any candidate they want.
CAVUTO: Yes, but once you give an inch, you know the argument is they are going to take a mile. Now, we might justify that and...
LAFFER: But what's the mile they can take? Raise their taxes?
CAVUTO: If you get your own electors, the next thing, we want to be an independent entity, not just two Chinas, just us. What do you make of that?
LAFFER: Well, I don't know what that would mean.
They're already independent. They have separate taxes. They have separate governance. They have separate everything.
CAVUTO: Yes, but they report to China, Art. They really do, right?
LAFFER: Well, they surely do pay profits to China, but I don't -- I mean, I think they're running a city very, very independent of China.
CAVUTO: Oh, no, no, I'm in full agreement with you, my friend. I didn't mean to sound belligerent.
I'm just saying that I wonder what this means longer term if let's say -- let's say Hong Kong is granted some of these rights it wants, and particularly on electors, et cetera. If you're mainland China and you're among the millions, the billions who are now doing much better as a result of this boom, aren't you going to want some of that action?
LAFFER: Of course.
But I think they're -- what -- China is trying to change the way they select the leader of the city. And I think that change will not take place. But China, this is the way they meet the rest of the world. This is the way they get prosperous. You know, without China, without this Hong Kong, China would have a hard time in the rest of the world. So, I think China needs a free and spirited Hong Kong very badly. I think we need China very badly and we need Hong Kong.
CAVUTO: Oh, there's no doubt, but the genie could be out of the bottle here if unrest can prompt China to back down, for perfectly justifiable reasons, to your point. But be careful what happens next. Right?
LAFFER: Well, you may be right, but, no, China has been having a phenomenal prosperity for many, many years now.
LAFFER: People are a lot better off than they were 20 years ago, I mean, a lot better off.
CAVUTO: No doubt.
LAFFER: As opposed to our president, who says we're better off than we were six years ago.
LAFFER: I liked your one on Scotland though best of all. We're better than we were 307 years ago.