The popularization of the idea that tax-rate reductions will increase tax revenues owed much to Arthur Laffer’s ability to present his ideas simply. In explaining his thoughts to a Wall Street Journal editor over lunch, Laffer reportedly took out his pen and drew the curve on a napkin. The editor retained the napkin and later reproduced the curve in an editorial in the Wall Street Journal. The Laffer Curve was born. The idea it portrayed became the centerpiece of economic policy under the Reagan administration (1981-1988), which cut tax rates on personal income by 25 percent over a three-year period. Laffer illustrated his supply-side views with a story relating to Robin Hood, who you may recall, stole from the rich to give to the poor. Laffer likened people traveling through Sherwood Forest to taxpayers, whereas Robin Hood and his band of merry men were government. As taxpayers passed through the forest, Robin Hood and his men intercepted them and forced them to hand over their money. Laffer asked audiences, "Do you think that travelers continued to go through Sherwood Forest?" The answer he sought and got, of course, was "no." Taxpayers will avoid Sherwood Forest to the greatest extent possible. They will lower their taxable income by reducing work hours, retiring earlier, saving less, and engaging in tax avoidance and tax evasion activities. Robin Hood and his men may end up with less revenue than if they collected a relatively small "tax" from each traveler for passage through the forest. While this is a fun story, it would be wrong to jump to the conclusion that personal income tax rates are presently so high in the United States that lowering them would lead to higher tax revenues. To the contrary, the negative revenue response from large tax cuts in the early 1980s and the positive revenue response from the tax-rate increase of 1993 suggest that the United States is located in the upsloping range of its Laffer Curve. Nevertheless, the drawing on Laffer’s napkin and his analogy of Sherwood Forest are good reminders that, beyond some height, higher tax rates will yield lower tax revenues.

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