Laffer Curve

Loading the player...

What is the 'Laffer Curve'

The Laffer curve, invented by Arthur Laffer, shows the relationship between tax rates and tax revenue collected by governments. The chart below shows the Laffer Curve:

Laffer Curve


The curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T*) would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually, if tax rates reached 100% (the far right of the curve), then all people would choose not to work because everything they earned would go to the government.

BREAKING DOWN 'Laffer Curve'

Governments would like to be at point T*, because it is the point at which the government collects maximum amount of tax revenue while people continue to work hard.

RELATED TERMS
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments ...
  2. Humped Yield Curve

    A relatively rare type of yield curve that results when the interest ...
  3. Positive Butterfly

    A non-parallel yield curve shift in which short- and long-term ...
  4. Net Of Tax

    An accounting figure that has been adjusted for the effects of ...
  5. Tax Rate

    The percentage at which an individual or corporation is taxed. ...
  6. Direct Tax

    A tax that is paid directly by an individual or organization ...
Related Articles
  1. Economics

    Understanding the Laffer Curve

    The Laffer Curve is a graph that shows how changes in tax rates can influence economic growth.
  2. Bonds & Fixed Income

    Yield Curve

    Learn more about how this curve is used to predict changes in economic output and growth.
  3. Taxes

    Do Tax Cuts Stimulate The Economy?

    Learn the logic behind the belief that reducing government income benefits everyone.
  4. Investing

    Trade Bond ETFs Using Yield Curves

    Different types of yield curves provide important insights for trading bond-based securities.
  5. Taxes

    Paying Uncle Sam: From Tobacco To $1 Trillion

    The services we rely on, like education, law and security, were built on taxes.
  6. Fundamental Analysis

    Understanding Term Structure of Interest Rates

    The term structure of interest rates is a common method of valuing bonds.
  7. Taxes

    Understanding Income Tax

    Income tax is a levy many governments place on revenue of entities within their jurisdiction.
  8. Taxes

    Use Tax Vs. Internet Sales Tax: How Are They Different?

    Learn about the differences between a use tax and an Internet sales tax. Find out about transactions in which the taxes apply, and to whom they apply.
  9. Taxes

    How Much Tax Do You Really Pay?

    When you add direct and indirect taxes together, your real tax rate is much more than you expected.
  10. Taxes

    The History Of Taxes In The U.S.

    The number of taxes that we now consider a given did not always exist. Find out how they arose.
RELATED FAQS
  1. Why are the term structure of interest rates indicative of future interest rates?

    Learn why economists believe the term structure for interest rates reflects investor expectations for future interest rates ... Read Answer >>
  2. How can the yield curve help me make investment decisions?

    Learn about the yield curve, and discover why this chart is an important economic indicator. How do Treasury bond yields ... Read Answer >>
  3. What does the yield curve actually predict?

    Find out what an inverted yield curve represents, how it has performed as a leading indicator and why it appears to hold ... Read Answer >>
  4. What's the difference between the marginal tax rate system and a flat tax?

    Find out about the difference between marginal tax rates and flat taxes. Gain insights on both systems and the arguments ... Read Answer >>
  5. What are the differences between regressive, proportional and progressive taxes?

    Understand the differences between the most common tax systems including regressive taxes, proportional taxes and progressive ... Read Answer >>
  6. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center