Laffer Curve

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DEFINITION of 'Laffer Curve'

Invented by Arthur Laffer, this curve 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.

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