LAFFER CURVE

The relationship between tax rates and tax revenue collected by the government. Formed by Arthur Laffer, the curve states there is an optimal tax income level to maximize tax revenues.

As taxes coming from low levels increases, tax revenue collected by the government also increases. When the tax rates reached a certain point (T*), it would cause people not to work hard or not to work at all, leading to reduction of tax revenues. If taxes are lower than point T*, the government would collect less taxes because taxpayers won’t be required to pay. But if it is higher than point T*, the government would collect less, meaning people would work less. Governments would like to reach point T* because they would collect maximum tax revenue while people continue to work hard.

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