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 ?
Now we turn to deriving the Laffer curve for the case of N identical individuals whose gross wage is 8(W = 8).
This Laffer curve reaches its peak at t = 1/3 and zero value tax revenues at t = 0 and at t = 0.
We now turn to deriving the aggregate Laffer curve of society as a whole, i.
5 the wealthy individual's Laffer curve is increasing, i.
In such a case the aggregate Laffer curve is diminishing with the tax rate in the region 1/3 < t < 0.
Now we derive the conditions under which the two peaks of the Laffer curve exist.
This finding has strong implications for the Laffer curve since the response of total revenues to a change in the income tax depends on changes in income from private inputs.
As indicated in Chart 3, the Laffer curve with public capital expenditures will be above the Laffer curve for lump-sum transfers.
Equivalently, the Laffer curve for public consumption lies above the Laffer curve of public investment (and it can be shown that the revenue-maximizing tax rate will be higher, too).
In other words, suppose that the prevailing tax rate was on the downward-sloping portion of the Laffer curve as indicated by point A in Chart 5.
20) If one believes that the downward-sloping portion of the Laffer curve is relevant, then such a policy would be a move from point B to point A in Chart 5.
The result here is that revenues decrease with the number of taxing authorities, not because of beneficial interjurisdictional competition, but because of the overtaxation of the tax base pushing the governments onto the backward-bending portion of the Laffer curve.