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Finance Dictionary and Glossary of Investment Terms
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.
A curve conjecturing that economic output will increase if marginal tax rates are cut. Named after economist Arthur Laffer.
A curve which supposes that for a given economy there is an optimal income tax level to maximize tax revenues. If the income tax level is set below this level, raising taxes will increase tax revenue. And if the income tax level is set above this level, then lowering taxes will increase tax revenue. Although the theory claims that there is a single maximum and that the further you move in either direction from this point the lower the revenues will be, in reality this is only an approximation.