Steven Hayward posted an article at Power Line Blog today about a Presidential Medal of Freedom that President Trump will be awarding to Arthur Laffer, the father of the Laffer Curve.
So what is the Laffer Curve. The International Finance website defines it as follows:
The term “ Laffer Curve” was coined by Jude Wanniski (former associate editor of the The Wall Street Journal) in 1978 when Wanniski penned an article named “Taxes, Revenues and the Laffer Curve”. In December 1974, Wanniski who was the associate editor of The Wall Street Journal along with Arthur Laffer, Professor at the Chicago University, Donald Rumsfeld ( Chief of Staff of to President Gerald Ford) and Dickey Cheney (Rumsfeld’s deputy) were discussing President Ford’s WIN (Whip Inflation Now) proposal for tax increases at a restaurant in Washington, Laffer grabbed a napkin and a pen and sketched a curve on the napkin illustrating the tradeoff between tax rates and tax revenues, Wanniski later named it as the “Laffer Curve”. A humble and honest academician who served Former U.S. President Ronald Reagan’s Economic Advisory Board, Arthur credited the theory to 14th century Muslim scholar Ibn Khaldun and eminent Economist John Maynard Keynes.
This is what the Laffer Curve looks like:
The “Laffer Curve” is a theoretical curve showing the relationship between applied income tax rate and the resulting government revenue. The theory propagates the following points:
- A tax rate of zero would result in zero government revenue
- A tax rate of 100% will also result in zero government revenue
- As the tax rate increases to above zero, there is an increase in the revenues of the government
- As the tax rate continues to increase, the resultant increase in government revenue begins to slow
- At a particular point the curve peaks and turns back towards the horizontal axis
The Laffer Curve is the reason that the federal government will collect more tax revenue this year despite the fact that President Trump lowered taxes. When taxes are raised, those with the money to hire good tax accountants find a way to avoid paying high taxes and tax revenues go down. Those of us without good tax accountants (usually the middle class) are stuck paying the increased taxes. The spending power of the middle class decreases, and the economy slows down. When the middle class has more money to spend, the economy does well.
Congratulations, Arthur Lapper. The recognition is well deserved.