Laffer curve

The Laffer curve, popularized and promoted by economist Arthur Laffer and often used to justify tax cuts, is intended to show that government can maximize tax revenue by setting a tax rate at the peak of this curve and that raising taxes further actually decreases revenue. The idea is clearest at both extremes of taxation—zero percent and one-hundred percent—where the government collects no revenue. At one extreme, a 0% tax rate means the government's revenue is, of course, zero. At the other, where there is a 100% tax rate, the government collects zero revenue because (in a "rational" economic model) taxpayers have no incentive to work or they avoid taxes, and the government collects 100% of nothing. Somewhere between 0% and 100%, therefore, lies a tax rate percentage that will maximize revenue.

Related Topics:
Economist - Arthur Laffer - Tax - Rational

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

The point at which the curve achieves its maximum will vary from one economy to the next and is subject to much theoretical speculation. Another contentious issue is whether a government should try to maximize its revenue in the first place.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

The Laffer-curve concept is central to the supply side economics theory, and the term was reportedly coined by Jude Wanniski (a writer for the Wall Street Journal) after a 1974 afternoon meeting between Laffer, Wanniski, Dick Cheney, and his deputy press secretary Grace-Marie Arnett (Wanninski, 2005; Laffer, 2004). In this meeting, Laffer reportedly sketched the curve on a napkin to illustrate the concept, which immediately caught the imaginations of those present. Laffer himself professes no recollection of this napkin, but writes, "I used the so-called Laffer Curve all the time in my classes and with anyone else who would listen to me" (Laffer, 2004). Laffer also does not claim to have invented the concept, attributing it to 14th century Islamic scholar Ibn Khaldun and, more recently, to John Maynard Keynes.

Related Topics:
Supply side economics - Jude Wanniski - Wall Street Journal - 1974 - Dick Cheney - 14th century - Ibn Khaldun - John Maynard Keynes

~ ~ ~ ~ ~ ~ ~ ~ ~ ~