Laffer Curve
A theoretical curve showing that tax revenue peaks at some intermediate tax rate, declining at both extremes.
What is Laffer Curve?
The Laffer Curve illustrates that tax revenue is zero at both a 0% tax rate (no tax collected) and a 100% rate (no incentive to earn taxable income), implying a revenue-maximizing rate somewhere in between. The concept is used to argue that tax cuts can increase revenue if rates are above the peak — by stimulating economic activity and expanding the tax base. Introduced by economist Arthur Laffer and popularized during the Reagan era, it became the intellectual foundation of supply-side economics and the 1981 Economic Recovery Tax Act. The core concept is theoretically sound, but empirical debate centers on where the revenue-maximizing rate actually lies and whether historical rate cuts produced enough growth to offset lost revenue.
Example
At a 0% income tax rate, the government collects $0. At a 100% rate, workers have no incentive to earn reportable income and the government again collects $0. Somewhere between those extremes — perhaps around 50–70% by some estimates for top earners — revenue is maximized. Tax rates above that peak are inefficient: a cut would raise more revenue by boosting work incentives and economic output.
Source: Investopedia — Laffer Curve