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Laffer Curve

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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:





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.

Notes:
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.


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

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But it makes sense if you consider the Laffer Curve 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.
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.
 
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