The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends, Revised and Updated Edition

Chart 79

You Can't Put a Number on It

Ronald Reagan may be one of the greatest actors ever to be president. Good looks, clever phrases, and folksy charm aside, he is also lucky. By now you should see he didn't cause lower interest rates; they have been falling together in lockstep throughout the world. He didn't make the long-sustained economic boom either; the economy has been booming worldwide. He has continued the explosion in federal spending, which is our biggest future problem. What is bothersome is the way he justifies himself with simplistic economic theory.

It all started with this chart—the Laffer curve, originally drawn on a restaurant napkin by economist Arthur Laffer to show there are always two tax rates that yield the same total tax take. It was popularized by Jude Wanniski in his modestly entitled book The Way The World Works. The chart plots tax rates against tax take (revenue). It shows just as much can be collected by charging less. Why? Because at very low tax rates, like point B, Uncle Sam can't collect much. And at high rates, like point A, folks feel overtaxed and won't work, so there's less to tax.

Obviously, there is an optimal rate for taxes—point E. There, the taxtake can't be boosted by raising tax rates, because folks will work less, but it can't be boosted by rate cuts, because further cuts won't generate harder workers—just less taxes.

Supply-siders leap from here to the assumption that tax-rate cuts create booming economies, which pay more total ...