Ideas change the world. A good example of this is how the global view of taxation quietly began shifting one afternoon in 1974. That afternoon, the
American economist Arthur Laffer met with Dick Cheney and Donald
Rumsfeld, who both were working for the Nixon-Ford Administration at the
time. The topic at hand was taxes, a pressing matter at a time when the
highest marginal tax rate in the US was fully 70 per cent.
During
the meeting, Laffer explained that the relationship between the tax
revenues and the tax rate was not as simple as one would expect.
Doubling the tax rate, for example, does not double the tax revenues,
because higher taxes disincentives people from working. To illustrate
his point, Laffer famously sketched a curve on a napkin. It showed that
both a tax rate at zero per cent and one at hundred per cent would yield
no tax revenues.
A tax rate of zero per cent would logically mean zero revenues, and one at 100 per cent would disincentives people completely from working, which also means zero revenues. The implication, Laffer noted, is that somewhere between zero and hundred per cent, there is a tipping point. Above this point, raising the tax rates would actually lead to such a damaging effect on economic incentives, that the collected taxes would actually be lower after the tax rate was raised.
[...] The funny thing is that Arthur Laffer’s theory was far from new. He was rediscovering a concept that had been acknowledged during the Islamic Golden Age period of free market policy. Laffer has himself explained that he didn’t invent the curve, but took it from Ibn Khaldun, a 14th-century Muslim, North African philosopher. Indeed, many of the ideas we today associate with Western free-market thinkers originated in the Islamic world.
