Laffer curve


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Laffer curve

A curve conjecturing that economic output will increase if marginal tax rates are cut. Named after economist Arthur Laffer.

Laffer Curve

An upside down parabola on a chart referring to a theoretical optimal tax rate that will maximize government revenues. The theory behind the Laffer curve states that there is a certain point, known as T*, at which a government collects the greatest possible amount in taxes. If taxes are lower than T*, the government collects less because taxpayers are not required to pay. If it is higher than T*, people have an incentive to work less because more of their money goes to the government and, as a result, the government collects less. Economists disagree about whether the Laffer curve is true, but even supporters agree that T* is only an approximation.
Laffer curveclick for a larger image
Fig. 109 Laffer curve.

Laffer curve

a curve depicting the possible relationship between INCOME TAX rates and total TAX revenue received by the government. Fig. 109 shows a typical Laffer curve. As tax rates per pound of income are raised by the government, total tax revenue, or yield, initially increases. If tax rate is increased beyond OR, however, then this higher tax rate has a disincentive effect so that fewer people will offer themselves for employment (see POVERTY TRAP) and existing workers will not be inclined to work overtime. The result is that the tax base declines and government tax receipts fall at higher tax rates. The possible Laffer curve relationship has been used by governments in recent years as a justification for cuts in tax rate as part of a programme of work incentives (see SUPPLY-SIDE ECONOMICS).
References in periodicals archive ?
Partly because of the connection of the Laffer curve with considerations about distribution versus efficiency, economists have attempted to calculate the top of the Laffer curve.
We did not compute the MCF for corporate income tax for Nova Scotia, Ontario, Prince Edward Island, or Saskatchewan because these four provinces are on the downward-sloping section of the Laffer curve with respect to their corporate income tax rates.
The truth is that the Laffer Curve held that high marginal tax rates discourage work effort, savings and investment, while promoting tax avoidance and evasion.
So, in these two cases, Laffer curve, (3) drug legalization, we have exceptions to the general rule that utilitarianism, broadly construed, and libertarianism, always work in the same direction.
Finance Minister Pranab Mukherjee's endorsement of the Laffer Curve principle is even more gladdening since he also held the portfolio in the 1980s in the Indira Gandhi Cabinet, presiding over perhaps the most regressive tax regime.
Now it appears that some Democrats, including President Obama, have grasped the idea behind the Laffer curve and the potential for more revenue by lowering tax rates.
His economic agenda consisted of little more than touting the Laffer Curve and other supply-side economic trivia.
The Laffer curve (Laffer, 2004) illustrates the basic idea that changes applied to tax rates have two effects on taxes: the arithmetic effect and the economic effect.
Hong Kong is an almost perfect example of the Laffer Curve in action--low tax rates generate high rates of real economic growth, leading to increased revenues which can be used for social welfare while maintaining low tax rates.
The Laffer Curve, one of the icons of supply-side economics, was born (American Spectator, Jan/Feb 2002).
The examples they had quoted were from the tax cuts of Reagan's era which led to fiscal deficits instead of increased tax revenues as the US economy at that time was on the left-hand-side of the Laffer curve instead of on its right that the Reagan's policy makers had assumed erroneously.
Irving Kristol's protege Jude Wanniski, the godfather of supply-side economics, used an AEI fellowship to write his 1978 book The Way the World Works, which promoted the dubious Laffer Curve, and its purported proof that tax cuts lead to more net government revenue.