[laf-er] Pronunciation Key | a relationship postulated between tax rates and tax receipts indicating that rates above a certain level actually produce less revenue because they discourage taxable endeavors and vice versa. |
] Based on the Random House Unabridged Dictionary, © Random House, Inc. 2006.
| Laf·fer curve or Laf·fer Curve
(lāf'ər) Pronunciation Key
n. A curved graph that illustrates the theory that, if tax rates rise beyond a certain level, they discourage economic growth, thereby reducing government revenues. [After Arthur Laffer (born 1940), American economist.] |
The American Heritage® Dictionary of the English Language, Fourth Edition
Copyright © 2006 by Houghton Mifflin Company.
Published by Houghton Mifflin Company. All rights reserved.
| laffer curve | |
noun | |
| a graph purporting to show the relation between tax rates and government income; income increases as tax rates increase up to an optimum beyond which income declines |
Laffer Curve
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: 
The curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T*) would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually, if tax rates reached 100% (the far right of the curve), then all people would choose not to work because everything they earned would go to the government.
Investopedia Commentary
Governments would like to be at point T*, because it is the point at which the government collects maximum amount of tax revenue while people continue to work hard.
Related Links
Economics Basics Tutorial
See also: Economics, Income Tax
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