Laffer Curve

Definition

A bell-shaped curve, associated with economist Arthur Laffer, showing the relationship between the tax rate and total tax revenue: beyond an optimal rate, raising the rate further reduces revenue.

Key points

• At a zero percent rate revenue is zero; at a hundred percent rate revenue is also (near) zero because there is no incentive to earn or report income.
• Between these extremes revenue rises, peaks at an optimal rate, then falls; the peak is the revenue-maximising rate.
• The idea underpins supply-side economics: cutting very high tax rates can sometimes raise revenue by expanding the tax base and reducing evasion.
• It is a conceptual illustration; the actual revenue-maximising rate is debated and varies by economy.
• It links to debates on tax buoyancy and the tax to GDP ratio.

Why it matters for CAPF

The shape (inverted U), the association with Arthur Laffer, and the core idea (very high rates can lower revenue) are testable static facts in taxation.

Common confusion

The curve does not say all tax cuts raise revenue; it says revenue falls only beyond the optimal rate, so cuts raise revenue only when the current rate is above that peak.

Parent note

taxation and gst