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 ?
Reagan was so enamored of the Laffer Curve idea that he famously promised to pay for his defense buildup with the revenues generated by his tax cuts.
Hamilton obviously saw that Laffer-type considerations could prevent the national government from exacerbating regional "oppression" by pushing tariff rates further up the upper portion of the Laffer curve. However, Hamilton left unaddressed the question of how to constrain governments to the lower portion of the Laffer curve where there are equivalent revenue possibilities with less regional "oppression." The latter is the issue that we argue the Confederates effectively addressed.
Another aspect of Debt Laffer curve analysis is related to the price elasticity of the market value of the debt.
(For discussion of the intuition behind the debt-relief Laffer curve, see, for example, Krugman, 1989; Sachs, 1986.)
"Thoughts on the Laffer Curve," Proceedings of the 1980 Economic Policy Conference, St.
Positive linear dependence leads to the conclusion that in both cases, according to the Laffer curve theory, the Laffer point lies to the right of the implicit rates of the selected economies.
Moreover, seigniorage itself faces its own Laffer Curve (known as the Bailey Curve, after economist Martin Bailey).
The Laffer Curve is a piece of economic mythology convenient for helping shield people like this from the consequences of their own actions.
In the media and the academy, however, the Laffer Curve widely is discredited.
The down side of the rational expectations innovation was that it left theorists arguing that a likely outcome was a stationary equilibrium on the high-inflation side of the Laffer curve. On the other hand, more sophisticated treatments of the adaptive expectations hypothesis, mostly appearing in the recent literature on learning in macroeconomic models, have found less tendency toward instability at low inflation rates.
First, if the share of foreign real balances is sufficiently large, then an elasticity of currency substitution that exceeds unity produces a Laffer curve which is very narrowly peaked around the exogenously given positive foreign inflation rate.
For a time, he even allowed himself to be swept along on the Laffer Curve, but his enthusiasm for that fiscal gimmickry came to an abrupt halt when Reagan married it to a huge defense buildup.