a graph suggesting that very high tax rates may so discourage productive efforts that fewer tax revenues are collected than if tax rates were substantially lower
This geometric representation by the economist Arthur Laffer sees an inflection point above which greater increases in taxes result in reducing revenue because they discourage taxable activity.
Invented by Arthur Laffer, this curve shows the relationship between tax rates and tax revenue collected by governments. The chart below shows the Laffer Curve
Named after Professor Art Laffer who suggested that as taxes increased from fairly low levels, tax revenue would also increase. But as taxes increased there would come a point where individuals would decide to stop working and hence overall tax revenues would start to fall.
The Laffer curve is named after Professor Art Laffer who suggested that as taxes increased from fairly low levels, tax revenue received by the government would also increase. However, there would come a point as tax rates where people would not regard it as worth working so hard. This lack of incentives would lead to a fall in income and therefore a fall in tax revenue. The logical end point is with tax rates at 100% where no-one would bother to work (understandably!) and so tax revenue would become zero. Drawn on a diagram this gives the Laffer curve: T* represents the optimum tax rate where the maximum amount of tax revenue can be collected.
The Laffer curve is used to illustrate the concept of Taxable income elasticity, the idea that government can maximize tax revenue by setting tax rates at an optimum point. The curve, developed by Arthur Laffer, is primarily used by advocates who want government to reduce tax rates (such as those on capital gains) whenever it appears to exceed this "optimum" level.