The Laffer Curve is considered by its opponents to be a form of ‘voodoo economics’, to use the phrase coined by George H. Bush when he ran against Ronald Reagan before becoming his vice president. But the Laffer Curve is just a simple graphical expression of an economic principle that has long been recognized and understood. In Jude Wanniski’s The Way The World Works he applies the principle of the Laffer Curve to examples throughout history.
Wanniski’s gives this example in a speech from Calvin Coolidge in 1924. It is as clear a description of the workings of the Laffer Curve as anything Arthur Laffer himself wrote a half century later:
In time of war, finances, like all else, must yield to national defense and preservation. In time of peace, finances, like all else, should minister to general welfare. Immediately upon taking office it was determined after conference with Secretary Mellon that the Treasury Department should study the possibility of tax reduction for the purpose of securing relief to all taxpayers of the country and emancipating business from unreasonable and hampering exactions. The result was the proposed bill, which is now pending before the Congress. It is doubtful if any measure ever received more generous testimony of approval…
The proposed bill maintains the fixed policy of rates graduated in proportion to ability to pay. The policy has received almost universal sanction. It is sustained by sound arguments based on economic, social and moral grounds. But in taxation, like everything else, it is necessary to test a theory by practical results. The first object of taxation is to secure revenue. When the taxation of large incomes is approached with that view, the problem is to find a rate which will produce the largest returns. Experience does not show that the higher rate produces the largest revenue. Experience is all in the other way. When the surtax on incomes of $300,000 and over was but 10 percent, the revenue was the same as when it was at 65 percent. There is no escaping the fact that when the taxation of large incomes is excessive, they tend to disappear. In 1916 there were 206 incomes of $1,000,000 or more. Then the high rate went into effect. The next year there were only 141, and in 1918, but 67. In 1919, the number declined to 65. In 1920 it fell to 33, and in 1921 it was further reduced to 21. I am not making argument with the man who believes that 55 percent should be taken away from the man with $1,000,000 income, or 68% from a $5,000,000 income; but when it is considered that in the effort to get these amounts we are rapidly approaching the point of getting nothing at all, it is necessary to look for a more practical method. That can be done only by a reduction of the high surtaxes when viewed solely as a revenue proposition, to about 25 percent.