Memo To: Art Laffer
From: Jude Wanniski
Re: Defending Your Curve
In this week's Barron's, columnist Gene Epstein craps all over supply-side economics and your lovely curve. After all these years, you would think these noodniks would understand there is nothing closer to absolute truth than the Law of Diminishing Returns. Anyway, I wrote a letter, which Barron's will probably not run. So I'll post it here on my website.
To the Editor:
Twenty years after I named the "Laffer Curve" after the Chicago professor of economics, Arthur B. Laffer, who drew it on a cocktail napkin in 1974, your columnist Gene Epstein still has not taken the trouble to find out what it means. In his 3/10 column, he denounces "supply-side economics," in a way that demonstrates he does not know what it is. Even neophyte journalists, fresh from school, are expected to ask basic questions of the subjects they are reporting or is analyzing. Mr. Epstein has had two decades to make a few telephone calls, but instead plunges ahead for Barron's with what he thinks he knows.
He is incorrect in stating that the Laffer Curve — which is simply the Law of Diminishing Returns as it is applied to tax policy — is a "cornerstone" of supply-side economics. The "curve" is simply a pedagogical device useful in the teaching of the economics of production, or supply, as opposed to the economics of consumption, or demand. Throughout the history of the world, political leaders have always understood that a tax increase, like a straw, can break the camel's back. It is one of the goals of statecraft to avoid rates of taxation that produce negative results. In the private sector, the Laffer Curve is understood as being axiomatic. Increasing the price of a private good or a private service beyond a certain point will reduce sales and revenues.
The most serious error your young journalist makes is in assuming that it simply represents taxation relative to labor, which is only one factor of production. If a tax rate is increased, all factors of production will feel its effects, capital as well as labor. If capital is discouraged by the higher rate, labor will per force have to work harder in order to produce the same volume of goods and services. Mr. Epstein observes people working hard at an 80% marginal tax rate, but at what income threshold. I will work hard at a 100% tax rate, as long as I do not encounter it until I make $1 million per year.
If Mr. Epstein wants to learn a bit about all this, he can become a student at Supply-Side University, which exists on my website. It is because there is so little understanding of the classical theory of production that I began offering lessons free of charge to the students of cyberspace. We now have 400 registered students around the world. If Mr. Epstein signs up, we will have 401.