The Laffer Curve and the Infamous Napkin
The Laffer curve is a diagram famously used by economist Art Laffer at a dinner
in 1974 to justify the government cutting taxes without cutting expenditures,
which would please many voters, if the justification were valid. The narrative
can be spotted by searching for the words “Laffer curve” (see Figure 5.1). There
are two epidemic-like curves (not to be confused with the Laffer curve itself) in
succession, the first rising until the early 1980s, the second rising after 2000,
when it became involved with another narrative justifying government deficits,
associated with the words “modern monetary theory.”
The Laffer curve looks like a simple diagram from an introductory economics
textbook, with one important difference: it is very famous among the general
public. The curve, which takes an inverted U-shape, relates national income tax
revenue to the rate at which income is taxed, taking account of the fact that
higher tax rates make people work less, thus decreasing national income. The
concept sounds like something that most people would find dull and boring. But,
somehow, the Laffer curve went viral (Figure 5.1).
The Laffer curve described in the narratives that are tallied in the figure owes
much of its contagion to the fact that it was used to justify major tax cuts for
people with higher incomes. The Laffer curve’s contagion related to fundamental
political changes associated with Ronald Reagan, who was elected US president
in 1980, and with Margaret Thatcher, who became prime minister in the United
Kingdom a year earlier, in 1979. Both were conservatives whose campaigns
promised to cut taxes. However, the Laffer curve narrative may not have played
a role in France’s election of a socialist president, François Mitterrand, around
the same time. An analysis of digitized French newspapers shows that “la courbe
de Laffer” went viral in France too, but not as much it did in the United States
and the United Kingdom.

FIGURE 5.1. Frequency of Appearance of the Laffer Curve
The economic narrative of Arthur Laffer’s dinner napkin diagram about the effects of taxes on the economy
shows a sharp epidemic around 1980 and a secondary epidemic after 2000. Sources: Author’s calculations
using data from ProQuest News & Newspapers 1950–2019, Books (Google Ngrams) 1950–2008, no
smoothing.
The Laffer curve narrative has a striking punch line that comes as a surprise
but usually does not provoke any laughter. The narrative goes like this: What is
the relationship between the rate at which income is taxed and the amount of tax
revenue collected by the government? Well, it is very clear that if the tax rate is
zero, zero tax revenue will be collected. At the other extreme, if the tax rate is
100%, then all income is confiscated by taxes. At a 100% tax rate, no one will
work, and again the tax revenue is zero. For tax rates between 0% and 100%,
some positive amount of tax revenue will be collected. When you connect the
points, you have the Laffer curve. And here is the punch line: because the curve
has the shape of an inverted U, there are always two tax rates that will collect a
given amount of tax revenue. That conclusion is a surprise, for hardly anyone
talks of a pair of tax rates for a given revenue. Obviously, to fund the
government, it is better to apply the lower of the two tax rates, not the higher.

The notion that taxes might reduce the incentive to earn income and create
jobs was hardly new. Adam Smith expressed the idea in the eighteenth century.6
Andrew Mellon, US treasury secretary from 1921 to 1932, was famous for his
“trickle-down” economics, and, along with US president Calvin Coolidge
(1923–29), successfully argued for reduction of income taxes that had remained
high for a while after World War I. But then the Mellon name began to fade
(outside of Carnegie-Mellon University), and the narrative lost its momentum.
The story of the Laffer curve did not go viral in 1974, the reputed year that
Laffer first introduced it. Its contagion is explained by an anecdote that was
published in Jude Wanniski’s 1978 book The Way the World Works. An editorial
writer for the Wall Street Journal, Wanniski wrote a colorful story about Laffer
sharing a steak dinner at the Two Continents restaurant in Washington, DC, in
1974 with Wanniski and two top White House powers, Dick Cheney7 and
Donald Rumsfeld.8 As the story goes, Laffer drew his curve on a napkin at the
restaurant table. Years later, after Wanniski’s death, his wife found a napkin with
the Laffer curve among her late husband’s papers. The National Museum of
American History now owns the napkin.9 Museum curator Peter Liebhold writes
of this napkin on the museum’s website:
Every museum curator searches for that incredible iconic object, a fabulous
artifact that is both physically interesting and represents a great moment in
American history. Sadly, such artifacts rarely materialize, and some of the
best stories turn out to be apocryphal. However, sometimes you strike gold. It
was my luck to beat the odds and collect an incredible story about American
business history, a story of political change, economic revolution, and social
impact—it was the real deal.10
The trouble is, Laffer himself disowned the napkin story. He wrote:
My only question on Wanniski’s version of the story concerns the fact that the
restaurant used cloth napkins and my mother had raised me not to desecrate
nice things. Ah well, that’s my story and I’m sticking to it.11
Laffer was being honest about his recollections, but his honesty could not stop a
story that was too good to be stopped.