The Jubilee of the Laffer Curve

Congratulations are in order for economist Arthur Laffer, who is due in October to be fêted by the Committee to Unleash Prosperity in respect of the jubilee of his famous formula. In 1974, a curve, illustrating the impact of supply-side tax cuts, was sketched on a napkin. Mr. Laffer will be joined by President Trump’s former economic advisor, Lawrence Kudlow, the committee’s Stephen Moore, and an ex-Federal Reserve board member, Kevin Warsh.There hasn’t been such a celebration of an idea, near as we can recall, since the 50th anniversary of Milton Friedman’s groundbreaking call, in 1955, for school vouchers. Friedman’s vision eventually flowered in the school choice movement, which is transforming public education and lifting countless students out of poverty. Mr. Laffer’s idea has been similarly momentous for fiscal policy, helping spark the Reagan Revolution and economic growth. A succinct summary of the Laffer curve comes from the former editor of the Wall Street Journal’s editorial page, Robert Bartley, in his recounting of the 1980s boom, “The Seven Fat Years.” The curve reflects the fact that “a tax of zero obviously raises no revenue,” Bartley wrote, “while a tax of 100 percent would extinguish the taxed activity and thus also raise no revenue.” Raising taxes too high puts revenue in a “prohibitive range.”The curve’s shape, Bartley explained, signals that if levies on income are set too high, “a tax cut would actually increase revenue.” The curve itself, Bartley related, was inked on a napkin at a Washington restaurant, the Two Continents, where Laffer was meeting with Dick Cheney and a Journal editor, Jude Wanniski. Laffer summed up his curve thus: “If you tax a product less results. If you subsidize a product more results.” The economist added: “We’ve been taxing work, output and income and subsidizing non-work, leisure and un-employment.” He reckoned “the consequences are obvious.” Laffer deemed his eponymous curve a “pedagogical device,” in Bartley’s telling. Yet before it was applied by Reagan it had been vindicated in the policies undertaken by two Republican presidents, Warren Harding and Calvin Coolidge, in the early 1920s, as well as proposals by JFK. In 1920, federal debt stood at $25 billion and Uncle Sam’s budget stood at $6.4 billion. Harding and Coolidge cut federal spending down to $2.9 billion by 1925, while deregulating the economy and cutting taxes. Their supply-side agenda sparked growth, and, presaging Laffer’s curve, “more than doubled the revenue from taxpayers earning more than $100,000 a year,” these columns have reported. A budget surplus, begun in 1920, expanded, and the debt fell to some $17 billion. That record inspired Reagan, after his landslide victory in 1980, to hang Coolidge’s portrait in the White House. After “the economic crisis of the 1970s,” Bartley wrote, the Gipper deployed “tight economic policy” and “incentive tax cuts,” inspired by the Laffer curve. That meant “you find the highest marginal rates and cut them,” Bartley said, and the result was “a wave of sustained growth and a dynamic outburst of entrepreneurial activity.”That outcome reflects a fact of human nature that’s all too often lost on the left. Nice for the Committee to Unleash Prosperity to fête the curve. It gets that when taxes rise beyond a certain point — say, the prohibitive rates eyed by Zohran Mamdani — high earners will simply forego the revenue, with disastrous effects. Fifty years on, the insight that Mr. Laffer says animated his curve is as vital as ever: “People don’t work to pay taxes, they work to consume.”

The Jubilee of the Laffer Curve

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