The Laffer Curve got its name back in 1974 when the American economist Arthur Laffer was discussing tax policy with Dick Cheney and Donald Rumsfeld (during the Nixon-Ford Administration). Arthur was explaining something that we've known for thousands of years, which is that doubling taxes will not double revenues, because people adapt to the policy. They either earn less, learn to game the system, or other things, but there's unintended consequences.
Laffer famously sketched a curve on a napkin which showed that both a tax rate at zero percent and one at hundred percent would yield no tax revenues -- and there's some peak, somewhere in the middle. Once you go beyond that threshold, raising taxes more, only decreases revenue, as you incentivize more and more people to drop out of the earning pool (or to cheat more, hide more money overseas, etc).
The whole idea of Atlas Shrugged (by Ayn Rand) was what would happen if the most Wealthy/Productive all had the taxes (regulatory burdens) became too much, and so they left en masse and created their own society? (What would happen to the rest). Basically, she was explaining why Communists States that provided so many social benefits, collapsed under their own weight: and her answer was that you get what you incentivized, and communism incentivized sloth and corruption. But these ideas go back further still.
Some of these ideas go back to several influential Muslim thinkers, who praised wealth accumulation and self-interest. One prominent supporter of low taxes was Tunisian Scholar Ibn Khaldun (14th century), who explained that lowering taxes stimulated business activity, and that raised tax income. And also that raising taxes, de-stimulated the economy, which could lower tax revenue. This is who Laffer was paraphrasing, but there were many before and since, that believed the same thing. Question the sanity or knowledge of anyone who has thought even superficially on economics and doesn't believe that.
These ideas go back to other Persian and Arab scholars like Al-Mawardi (10th century) who discussed the same risks with public borrowing. Abu Yusuf (8th-century chief judge of Baghdad) also wrote of cost-benefits and unintended consequences in public works. (Similar ideas as laffer). And even some Roman and Greek philosophers hinted at similar ideas, centuries earlier.
Presumably, the tithe in Christianity (Leviticus 27:30; Numbers 18:26; Deuteronomy 14:24; 2 Chronicles 31:5, James 1:5, 2 Corinthians 9:7) is set around 10% for similar reasons. To tax more, would to get less compliance, or harm the people who are contributing.
Laffer Curve Discredited
Democrats despise the Laffer Curve, because it proves their knee-jerk response to every problem (of raise taxes) is not unconditionally correct -- or conversely, it supports the conservatives belief in Trickle Down Economics (aka economics), and the idea that cutting taxes at the top, can help people on the bottom. So whenever Laffer is brought up, they reflexively attack it, or anyone that mentions it, because the facts and history isn't on their side. They often bring up stuff like Reaganomics (he cut the tax rate, and increased revenues) as an example, but I'm not exactly sure why, because facts are on his side: the tax cuts resulted in more revenue by the end of his term, than he started with: proving the theory of Laffer correct. But the problem is Democrats (who controlled the House/Senate) raised spending even more, so deficits went up anyway. It helps to note that JFK, Kennedy, and virtually all Presidents before FDR, believed the same things as Reagan (and that cutting taxes could stimulate the economy). And we have many dozens of examples of it working. We have no examples of a country taxing itself into prosperity, despite hundreds of failed Socialist/Communist countries that tried.
The problem with the Laffer curve is that it's theoretical and situational: not black and white. In a war or threat for survival, people will put up with higher tax burdens (short term). Sometimes, people will just start giving up (for personal or moral reasons), or just retire early, even when the tax rate hasn't changed. So some economists have proven that the Curve is situational, and varies by individual and culture (where they draw the lines). So it's not a simple clear and consistent amount that peaks at 50% tax (which is how Laffer drew it as an illustration of the problem), it's a multi-variable equation that may skew up or down, shift over time, and even have more than one peak.
Those caveats are what the Democrats use to say, "See Laffer Curve is not correct, and you can ignore it or consider it disproven".
Like many things the Democrats say, it makes their audience dumber for believing it.
The first part is true -- the Laffer Curve is a theoretical concept, and not an actual formula as simple as Rolle's theorem where you can solve for f'(c)=0. Or in english, that there's a single magical point that will work for all people. There might be two or more peaks, and the peaks shift over time. Howevery, the behavior is real that raising taxes, at some point can have diminishing returns. So while it's just not as simple as the 2 dimensional plot, no rational economists or educated person would deny that there are consequences for raising taxes beyond some point.
Thus, when I hear someone claim the "Discredited Laffer Curve" or something like that, I know to tune them out as being too stupid for the conversation we are having, unless the conversation is about how some people who understand a little of something can be dumber than people who know nothing about the topic.
Here are just a few cases where the Laffer Curve exists, in some form or another: 2 items
- 2019.02.04 NY Tax-Increase causes $2.8B deficit - Gov. Cuomo decried that people were fleeing the states high income taxes causing a revenue shortfall of $2.8 billion, and is making him reconsider spending on schools, health care and repairs to roads and bridges. (They could easily take it out of the highest ticket items like Social Programs to cover the shortfall -- but if they did that, few would notice and allow him to raise taxes later).
- 1981 Reaganomics - Reagan cut taxes in 1982 and 1986, which resulted in:
- federal revenues skyrocketing from just over $517 billion in 1980 to more than $1 trillion in 1990 (+28% inflation adjusted dollars)
- Real GDP went from 3.2% avg in Carters term, to 4.5% (avg or final) over Regan's 6 years (post tax cut).
- Inflation dropped from ≈13% to ≈5%.