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 ?
(37.) Slemrod (1998a) and Slemrod and Kopczuk (1998) have emphasized that the taxable income elasticity will depend directly on the enforcement regime and other aspects of the tax system.
(Burns and Ziliak 2016) In light of this new evidence, in the discussion and tables that follow, I assume a taxable income elasticity of 0.4, the midpoint between Saez et al.
They brought the concept of taxable income elasticity to the fore and showed how it could be measured empirically.
However, taxpayers were apparently much more responsive to tax rate changes in 1979 than 1991, because Long and Gwartney concluded that in 1979, the taxable income elasticity with respect to the marginal tax rate was probably in the -0.6 to -1.5 range for incomes above $60,000.