Knowra Laffer curve Laffer curve The Laffer curve depicts how tax revenue may vary with tax rates, typically rising from zero, peaking at an intermediate rate, and falling as rates approach 100%.
Tax rate : The proportion of a tax base collected by a government as tax. It is the curve’s horizontal variable and determines the share collected from each taxable unit.
Tax policy : Government decisions about which taxes to impose and how to set and administer them. The curve frames debates about choosing rates to balance revenue and behavioral responses.
Arthur Laffer : An American economist associated with popularizing the Laffer curve in policy debate. His name became attached to the curve after discussions with political figures in the 1970s.
Tax cuts : Reductions in tax rates, tax liabilities, or the scope of taxation. A tax cut raises revenue only if the starting rate and behavioral response place the change on the relevant part of the curve.
Tax base : The income, transactions, property, or other amounts subject to taxation. It is the activity whose size can change as tax rates change.
Revenue-maximizing tax rate : The tax rate at which a given tax system collects its greatest revenue under specified conditions. This is the peak rate the curve is often used to illustrate.
Jude Wanniski : An American journalist and political commentator who helped popularize supply-side economics. His account of a 1974 dinner helped establish the curve’s origin story.
Keynesian economics : An economic tradition emphasizing aggregate demand and its role in output, employment, and stabilization. Revenue arguments based on demand effects differ from the curve’s focus on tax-rate incentives.
Taxable income elasticity : The responsiveness of taxable income to changes in tax rates. It helps determine how strongly a higher rate contracts reported taxable income.
Tax incidence : The distribution of a tax’s economic burden among buyers, sellers, workers, and owners. Behavioral adjustments shift burdens and taxable activity as rates change.
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