Arthur Laffer

The idea in one paragraph

Two tax rates raise exactly zero revenue. At 0%, obviously - nothing is collected. At 100%, less obviously - nobody works, hides income, or works off the books, so there's nothing to collect. Between those two zeros, revenue rises and then falls, tracing a curve with a peak somewhere in the middle. Which means a government taxing above the peak could cut rates and collect more money. Everyone agrees the curve exists; the trillion-dollar fight is over where the peak sits - and whether any real country is actually on the far side of it. The fight began, allegedly, on a cocktail napkin.

The world they lived in

Arthur Laffer was born in Youngstown, Ohio, in 1940, studied economics at Yale, and took his PhD at Stanford. By his early thirties he had been a University of Chicago professor - the department of Milton Friedman, whose faith in incentives he absorbed completely - and the first chief economist of the Office of Management and Budget, under George Shultz. The 1970s were miserable for the Keynesian consensus: stagflation was grinding through the economy, and President Ford's big idea, in late 1974, was a tax increase plus "Whip Inflation Now" buttons.

Which sets the scene for the most famous napkin in economics. In the 1978 article that named the curve, journalist Jude Wanniski described an evening in 1974 at the Two Continents Restaurant in Washington's Hotel Washington: him, Laffer, and two White House men - Donald Rumsfeld, Ford's chief of staff, and his deputy Dick Cheney, Laffer's old Yale classmate. Arguing against the tax hike, Laffer supposedly sketched the curve on a napkin. Laffer can't remember the evening and doubts the detail - the napkins were cloth, "and my mother had raised me not to desecrate nice things." He's equally insistent the idea wasn't his, crediting the 14th-century scholar Ibn Khaldun - dynasties, he'd observed, collect large revenue from small assessments early and small revenue from large ones late - and John Maynard Keynes, who wrote that a tax increase can sometimes shrink the budget. The curve was old; the napkin made it a movement.

What they argued

The mechanics rest on a distinction Laffer hammers everywhere: every tax-rate change has an arithmetic effect (higher rate, more revenue per dollar of income) and an economic effect (higher rate, fewer dollars to tax, as people work less, invest less, or take pay in untaxed forms). At low rates, arithmetic wins. At high rates, the economic effect takes over - raise the rate and the tax base shrinks faster than the rate rises. Steelmanned, the supply-side claim is careful: cuts in very high marginal rates - the 70%-and-up brackets that actually existed in the 1970s - can lose little revenue and occasionally gain some, because they revive effort and drag hidden income back into the open. Serious supply-siders never claimed every tax cut pays for itself; the revenue response, Laffer wrote, depends on the tax system, the time frame, and how easily people can dodge.

That argument found its politician. Laffer served on Ronald Reagan's Economic Policy Advisory Board from 1981 to 1989, as the top federal income-tax rate fell from 70% to 50% and eventually 28% - the heart of the supply-side program. Supply-siders point to the post-1982 boom and the surge of reported top incomes after rate cuts as the curve at work; skeptics reply that much of the surge was income shifting between tax forms, and that revenue as a share of the economy fell after 1981. Both can be true; both were.

So where is the peak? Mainstream estimates put it high: the widely cited Diamond–Saez (2011) figure for the revenue-maximizing combined top rate is around 70%, though estimates vary and the number is genuinely contested. Much less contested is the corollary: actual US rates sit far below that, so cutting them from today's levels loses revenue. Asked in 2012 whether a US federal income-tax cut would raise revenue within five years, not one member of the IGM panel of leading economists - drawn from across the political spectrum - agreed; scorekeepers like the Congressional Budget Office find growth effects claw back only a modest fraction of a cut's cost. "Tax cuts pay for themselves," as a general claim about real-world rates, is rejected by most economists; "some tax cuts, from some rates, recover part of their cost" is standard economics - and both statements fit comfortably on Laffer's curve. Don't take anyone's word for where the peak is: play with the curve - uncertainty band included - in our tax explorer.

Where it breaks down

The modern cautionary tale is Kansas. In 2012, Governor Sam Brownback - with Laffer as a paid consultant - slashed income-tax rates and zeroed out taxes on "pass-through" business income, promising a "real live experiment" in supply-side growth. The experiment failed on its own terms. Analyses by the Tax Policy Center and the Center on Budget and Policy Priorities found job growth and GDP lagging the nation and neighboring states, revenues roughly $700 million a year short, and the state's credit rating downgraded. In 2017 the Republican-controlled legislature repealed the cuts over Brownback's veto. Laffer still defends the experiment; most public-finance economists read Kansas as a straightforward demonstration of what happens when you cut taxes while already below the curve's peak. The verdict is contested by the participants; few others call it close.

The deeper critiques are older. First, the curve is a picture, not a measurement: it says a peak exists, not where you are - so it can justify any tax cut if you simply assert you're on the right-hand side, which, critics note, advocates almost always do. George H. W. Bush famously called the strong version "voodoo economics" in the 1980 primaries, and Reagan's own budget director, David Stockman, later conceded the 1981 cuts were oversold; federal debt roughly tripled during the Reagan years. Second, the salesmanship: Greg Mankiw - economist, textbook author, and Republican adviser - compared those claiming broad self-financing tax cuts to "charlatans and cranks." He softened the phrasing in later editions; the profession's estimate of the claim, not much.

Lasting influence

Few single images have moved as much policy. The curve gave the 1980s tax revolution its intellectual shorthand, and top marginal rates fell across the rich world - from 70%-plus territory to the 35–50% range. It changed the machinery of policymaking too: US budget scorekeepers now do "dynamic scoring," estimating how tax changes alter behavior - a bureaucratized, carefully hedged descendant of the napkin. And it handed every tax debate a shared question - which side of the peak are we on? - which is the right question even when answered in bad faith.

Laffer himself became that rare thing, an economist with a fan base: adviser to Reagan and later to Donald Trump's 2016 campaign, and recipient of the Presidential Medal of Freedom in 2019. The cloth napkin Wanniski kept now sits in the National Museum of American History - though given the mother-and-nice-things objection, it may be a later re-creation, which is somehow fitting. The curve is true at the ends, fought over in the middle, and unkillable - as of this writing, its author is in his mid-eighties and still cheerfully arguing that your country's peak is lower than you think.