50 Ruffer Curve
At the Capitol on May 13, guests gathered for a celebratory dinner marking an anniversary that, while not officially recognized, certainly deserves acknowledgment.
Looking back to September 13, 1974, the young economist Arthur Laffer aimed to articulate the concept of an optimal tax rate—one that maximizes both tax revenue and economic growth. He managed to condense his rapid-fire explanation into a simple visual—the familiar convex shape sketched on a restaurant napkin.
Laffer argued that there are two tax rates at which the government would generate no revenue: zero percent and 100 percent. At a 100% tax rate, the return after tax is, well, zero. So, why would anyone bother working? Somewhere between those two extremes lies the ideal rate for boosting both revenue and growth. Laffer claimed that the existing rates—up to 70%—were excessively high, leading to declining revenue. He maintained that reducing the tax rate could actually enhance our revenues and stimulate growth.
Interestingly, Laffer didn’t claim sole credit for this insight. The 14th-century Arab philosopher Ibn Khaldun made similar observations, and later thinkers like Adam Smith and John Stuart Mill also contributed to these ideas. More recently, in 1962, President John F. Kennedy stated, “The paradoxical truth is that tax rates are too high and too low, and the healthiest way to make profits in the long term is to cut tax rates now.”
Regardless, Laffer’s contributions were significant. He distilled this wisdom into a single, memorable visual. With help from others, including the late Jude Waniski—who first coined the term “Laffer Curve”—they developed a school of thought centered on productivity and wealth creation, known as supply-side economics.
Resistance from Both Parties
However, as is often the case with new ideas, guardians of older concepts can be skeptical, even antagonistic. Although Democrats under Kennedy embraced some principles of supply-side thinking—and the economy surged after Kennedy’s tax cuts in 1964—most Democrats maintained a stance against it.
Why? They couldn’t quite reconcile the idea that helping the wealthy could lead to broader economic benefits. “Social Justice” was prioritized over growth, they argued, even if it meant sacrificing potential tax revenue. This mindset still resonates with many Democrats today.
On the Republican side, the notion of tax cuts was often viewed as a way to bolster their income. They seemed to misunderstand Laffer’s message that cutting tax rates could actually result in rising tax revenues.
By the late 1960s, both parties had settled into a peculiar consensus against growth; higher taxes and stricter regulations became the norm. Predictably, even as inflation surged, economic growth stagnated.
During the downturn of the 1970s, Laffer sketched out his famous curves. With his characteristic enthusiasm, he convinced many Republicans—and even some Democrats—that tax cuts could revive the faltering economy.
Reagan’s Paradigm Shift
The most significant ally in this movement was Ronald Reagan. As the 40th president from 1981 to 1989, he enacted tax cuts across the board, significantly lowering both individual and corporate tax rates. The results were notable: rapid economic growth, decreasing inflation and unemployment, and a substantial increase in GDP.
Over the following fifty years, tax rates saw various adjustments, contributing to a lengthy economic boom. The per capita GDP is now 2.5 times what it was in 1974.
Now, President Donald Trump is spearheading another wave of growth initiatives. His focus on tax reductions, deregulation, and energy development has attracted a surge of investments into the U.S., accumulating to a staggering $12 trillion. Trump has publicly acknowledged Laffer’s influence, honoring him with the Presidential Medal of Freedom in 2019.
At the Capitol, it was a moment worth celebrating. Laffer, now 84, was recognized by Steve Moore of Unleash Prosperity, a group advocating for growth-oriented policies. House Speaker Mike Johnson (R-LA) praised Laffer, alongside an array of notable figures including Kellyanne Conway and Sen. Rand Paul.
Yet amid the festivities, there were serious undertones. Laffer shared at least three key lessons for the future. Currently, Trump’s tax bills are being considered in Congress, aiming to reduce corporate tax rates to be more competitive than those of key adversaries like China.
Looking ahead, there is a broader vision to develop. We must ensure that Laffer’s contributions, particularly from that pivotal moment in 1974, are permanently recognized, believing that this ideological battle is one we can ultimately win, all thanks to supply-side thinking.
And one last thing: Art Laffer deserves a Nobel Prize for his unparalleled impact on economic growth and human prosperity.
