I.O.U.S.A - Addison Wiggin [119]
Arthur Laffer: Back in the 1970s, when we devaluing the dollar and doing the Smithsonian Accord and Camp David, our delegations would go to France and meet at the Hôtel de c17.indd 238
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Crillon. I took my wife - to - be at the time to Paris and I wanted to propose to her in Paris. Now, I ’ m a huge Francophile and I love the country. Hôtel de Crillon Hotel is the hotel in Paris. I went there and tried to get the room that I ’ d had during the olden days and I couldn ’ t remember what room number it was. They said,
“ Oh, don ’ t worry, Dr. Laffer, it ’ s room . . . , ” whatever it was. I said, “ Goodness, how do you remember that? ” He said, “ Because that ’ s the only room that was bugged. ” I think they may have been joking, but it was a riot. I did propose to my wife there and, unfortunately, she did not accept. She said she ’ d think about it. It took her six weeks to make the decision.
Q: Yeah, the napkin, because I think that now has sort of stretched into a story of its own.
Arthur Laffer: My classmate at Yale, a good, good friend of mine, is Dick Cheney. He ’ s a spectacular person. He ’ s a fi ne, decent, wonderful guy and a great public servant, one of the greatest I know. I used to have dinner once a week with Don Rumsfeld when Nixon was having all of his problems. Spiro Agnew was gone, and Ford came in as vice president and I would have dinner, alone, with Don Rumsfeld. He was an ambassador to NATO and then he came over here as chief of staff for Ford and we ’ d have dinner. And every now and then, we ’ d invite someone to join us.
At the Two Continents Restaurant, right next to the Treasury, we invited a guy named Jude Wanniski who was writing for the Wall Street Journal at the time, and Dick Cheney, who was Don Rumsfeld ’ s deputy chief of staff. It was during the time that Ford had that silly, silly program called Whip Infl ation Now, the WIN
program. It was just an acronym for a 5 percent tax surcharge, which is just goofy, silly, sparkle - headed stuff, but they did it.
What I was trying to explain to him there at the restaurant was that a 5 percent tax surcharge will not lead to 5 percent more in revenues. It may lead to 4 percent more in revenues. It may lead to 3 percent, but it may also cost you revenues because there ’ s always the feedback effect. When you raise tax rates, you reduce the incentives for doing an activity and, therefore, you shrink the c17.indd 239
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Interviews
tax base . How far that base shrinks given the tax rate increase is an empirical question and depends on how long you ’ re willing to wait.
I was explaining that, and I supposedly drew the curve on the restaurant napkin. Now, I can assure you it was not the Two Continents ’ Restaurant where I did that, no matter what Jude Wanniski wrote two years later, because my mom was a lovely, lovely lady and she taught me, “ Arthur, never, ever, ever draw on cloth napkins, ” and they had cloth napkins.
But the Laffer curve was what I always used in class to show students that there are two effects of tax rates. One is the arithmetic effect, which is the higher tax rate, the more revenue collected per dollar of tax base. But the other one is the economic effect: If you raise tax rates, you reduce the incentives for doing that activity and you contract the tax base. These two effects always work in opposite directions. Sometimes the arithmetic effect wins and sometimes the economic effect wins. It depends on where you are in the curve, how long you ’ re willing to wait, and how broad the tax is. But it was a fun story that Jude wrote about in the Two Continents Restaurant there at the Hotel Washington.
Q: You mentioned you didn ’ t think Paul Volcker had raised interest rates?
Arthur Laffer: Paul Volcker is a hard money guy. He controlled the monetary base, and Paul Volcker understood that the Fed doesn ’ t control interest rates. They set the discount rate back then, but the discount rate followed the market; it didn ’ t lead the market. That was