This is my version of the Laffer Curve. What it shows is how basic economics and incentives work. If tax rates are zero, the government obviously collects no tax revenues. And if tax rates are 100%, the government also collects no revenues, because no one has an incentive to work. There is a tax rate "C" which maximizes the economy's strength and tax revenues. Higher rates produce a disincentive to work and invest, and thus reduce revenues, while lower rates also result in reduced revenues. If tax rates are too high (which is what Laffer originally asserted), then reducing tax rates can result in increased investment and work, thus increasing revenues by increasing the tax base.
But to see the original version and hear the key players recount their memories of where and when it was first drawn (forty years ago this month), and how it went on to impact fiscal policy during the Reagan administration, I recommend you read this BloombergBusinessweek article, "The Napkin Doodle That Launched the Supply-Side Revolution," which also includes a video.
Key takeaway:
How would you classify the Laffer Curve today?Laffer: It’s the same as always. It works. It’s not Republican, it’s not Democratic, it’s not conservative, it’s not liberal, it’s not left-wing, it’s not right-wing. It’s economics. People respond to incentives, and if you make something more attractive, they will do more of it. If you make something less attractive, they will do less of it. If you tax rich people and give the money to poor people, you are going to get lots and lots of poor people and no rich people. The dream in our country has always been to make the poor rich, not to make the rich poor.
As the BloombergBusinessweek article notes, the Laffer Curve proved to be one of the most special and disruptive events of the past 85 years. I consider myself lucky to have been mentored by both Art Laffer and Jude Wanniski.
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