The story goes that back in 1974, economist Art Laffer was having a drink in a DC bar when he took out a pen and sketched his famous curve, demonstrating that raising tax rates could lead to lower rather than higher revenues for the government. The “Laffer Curve” is a well-known analytical tool today, but back in 1974, it was daring new thinking.
In this guest post on “Bastiat’s Window,” Grace-Marie Turner writes about its origin.
First, she sets the scene. Laffer is seated with Dick Cheney. Turner writes:
Laffer, then a professor of economics at the University of Chicago who had previously served as chief economist in Nixon’s Office of Management and Budget, wanted Cheney to understand that high taxes were stifling productivity and investment. Cutting taxes would fuel economic growth, and robust growth would, in turn, yield more revenue to fund the federal government.
Cheney was having a hard time grasping the concept.
Gosh — that shouldn’t be hard to grasp. When the government takes resources away from private sector uses, that means shuffling resources from the sector where competition ensures that they will be used efficiently and into the sector where politics ensures that they’ll be largely wasted. For a growing economy, reduce the government drag on it.
Ford’s team didn’t latch on and instead offered up campaign pabulum like the “Whip Inflation Now” slogan. Ronald Reagan, however, got what Laffer was saying. Turner continues, “Reagan was sold. The promise of a 30% across-the-board tax cut became the centerpiece of his domestic campaign plan. He prevailed in 1980 to win the Republican nomination and the presidency—and ushered in two decades of prosperity with the passage of the Economic Recovery Tax Act, a.k.a. the Kemp-Roth Tax Cuts.”
And what of the famous napkin? Turner says, “The Smithsonian’s National Museum of American History purports to have a Laffer Curve napkin [], but it is cloth and looks like a folded dinner napkin. The casual bar at the Hotel Washington was much more likely to have had paper cocktail napkins. And who would take a pen and ink to a cloth napkin anyway—not to mention signing and dating something that none knew at the time would be regarded as historic? (Art himself said years later that he had better manners than to think he could ruin a nice napkin with a pen.)”
Read the whole thing.