Our friend Grace-Marie Turner is one of America’s top healthcare analysts, but she also has the distinction of having sat in on a famous dinner in Washington that changed economics forever. She recently wrote about her recollections of that meeting.
Grace-Marie was a young reporter and attended the dinner in 1974 between then White House chief advisors to Gerald Ford – Dick Cheney and Don Rumsfeld – along with the Wall Street Journal editorial writer Jude Wanniski. Jude coined the phrase “the Laffer Curve.” It was at this meeting that Laffer wrote the curve (below) on a famous cocktail napkin (now in the Smithsonian Institute).
Here is how Wanniski described what happened:
“’There are always two tax rates that yield the same revenue,’ observes Arthur Laffer…[who] drew the curve shown above to illustrate his point.
When the tax rate is 100 percent, all production ceases in the money economy. People will not work in the money economy if all the fruits of their labor are confiscated by the government. An individual will not work for $1,000 a day if, after taxes, his paycheck comes to zero. Because production ceases, there is nothing for the government’s 100 percent rate to confiscate, and revenues to the state are also zero.
On the other hand, if the tax rate is zero, people can keep 100 percent of what they produce in the money economy. There is no government wedge, and thus no governmental barrier to production, so production is maximized … but because the tax rate is zero, government revenues also are zero.”
Political leaders’ job is to find that optimal balance where workers and investors are incentivized to work and produce but where there is sufficient revenue for the government to operate and provide its essential services.
Some 50 years later, why is this concept so hard for politicians to understand?