Laffer curve

A basic representation of a Laffer curve, plotting government revenue (R) against the tax rate (t) and showing the maximum revenue at t*

In economics, the Laffer curve illustrates a theoretical relationship between rates of taxation and the resulting levels of the government's tax revenue. The Laffer curve assumes that no tax revenue is raised at the extreme tax rates of 0% and 100%, meaning that there is a tax rate between 0% and 100% that maximizes government tax revenue.[a][1][2]

The shape of the curve is a function of taxable income elasticity—i.e., taxable income changes in response to changes in the rate of taxation. As popularized by supply-side economist Arthur Laffer, the curve is typically represented as a graph that starts at 0% tax with zero revenue, rises to a maximum rate of revenue at an intermediate rate of taxation, and then falls again to zero revenue at a 100% tax rate. However, the shape of the curve is uncertain and disputed among economists.[3]

One implication of the Laffer curve is that increasing tax rates beyond a certain point is counter-productive for raising further tax revenue. Particularly in the United States, conservatives have used the Laffer curve to argue that lower taxes may increase tax revenue. However, the hypothetical maximum revenue point of the Laffer curve for any given market cannot be observed directly and can only be estimated—such estimates are often controversial. According to The New Palgrave Dictionary of Economics, estimates of revenue-maximizing income tax rates have varied widely, with a mid-range of around 70%.[4] The shape of the Laffer curve may also differ between different global economies.[5]

The Laffer curve was popularized in the United States with policymakers following an afternoon meeting with Ford Administration officials Dick Cheney and Donald Rumsfeld in 1974, in which Arthur Laffer reportedly sketched the curve on a napkin to illustrate his argument.[6] The term "Laffer curve" was coined by Jude Wanniski, who was also present at the meeting. The basic concept was not new; Laffer himself notes antecedents in the writings of the 14th-century social philosopher Ibn Khaldun and others.[7]


Cite error: There are <ref group=lower-alpha> tags or {{efn}} templates on this page, but the references will not show without a {{reflist|group=lower-alpha}} template or {{notelist}} template (see the help page).

  1. ^ L.H. Meyer (December 6, 2012). The Supply-Side Effects of Economic Policy. Springer Science & Business Media. p. 83. ISBN 978-94-009-8174-4.
  2. ^ Gahvari, Firouz (1989). "The nature of government expenditures and the shape of the laffer curve". Journal of Public Economics. 40 (2): 251–260. doi:10.1016/0047-2727(89)90006-6. ISSN 0047-2727.
  3. ^ Irvin B. Tucker (2010), Survey of Economics, Cengage Learning, p. 341, ISBN 978-1-4390-4054-6
  4. ^ Fullerton, Don (2008). "Laffer curve". In Durlauf, Steven N.; Blume, Lawrence E. (eds.). The New Palgrave Dictionary of Economics (2nd ed.). p. 839. doi:10.1057/9780230226203.0922. ISBN 978-0-333-78676-5.
  5. ^ Trabandt, Mathias; Uhlig, Harald (May 1, 2011). "The Laffer curve revisited". Journal of Monetary Economics. 58 (4): 305–327. doi:10.1016/j.jmoneco.2011.07.003. ISSN 0304-3932.
  6. ^ "To Donald Rumsfeld". Polyconomics.com. Archived from the original on May 3, 2011. Retrieved December 13, 2012.
  7. ^ Cite error: The named reference Heritage was invoked but never defined (see the help page).

From Wikipedia, the free encyclopedia · View on Wikipedia

Developed by Nelliwinne