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 ?
Taxes, revenues, and the Laffer curve. The Public Interest, 50(Spring), 3-16.
It has been said that one of the great advantages of the Laffer curve is that you can explain it to a congressman in half an hour and he can talk about it for six months.
The Laffer curve shows the relationship between tax revenue, T, and the tax rate, t, for any level of basic gross wage rate W, and labor supply, L.
(7) t = 1 - 4/W/1 + 4/W the tax revenue is at its maximum (peak point of the Laffer curve).
Therefore, the Laffer curve increases at an increasing rate.
A good place to start is with what is popularly known as the Laffer curve, which shows how tax rates and tax revenues are related.(1) Essentially, the Laffer curve posits that as tax rates rise continuously from zero, tax revenues rise up to some maximum after which tax revenues fall.
Because most analyses of the Laffer curve occur in a static framework that has proved inadequate, this analysis presents a simple dynamic model that resembles the discussion in Baxter and King (1995).
Fullerton (1982) summarizes the Laffer curve literature.
In particular, it allows one to explore the Laffer curve in a long-run context and also illustrates how the Laffer curve depends on the disposition of tax revenues.
Returning to the Laffer curve diagram in Figure 3a, the Nash equilibrium result for two revenue-maximizing governments occurs at point A.
In fact, the Laffer curve relationship would imply that eventually the isorevenue curves would turn back on themselves and have a positive slope.
Because of this weighted averaging process, the federal tax rate will lie on the upper (or backward-bending) portion of the Laffer curve in one state and on the lower portion of the Laffer curve in the other.