Laffer Curve

Introduction

• It is a graphical representation of the relationship between possible rates of taxation and the resulting levels of government revenue. 
• Arthur Laffer plotted the curve on a graph with revenue displayed on the vertical axis and the tax rates on the horizontal axis. 
• The relationship suggests that revenues decline beyond a tax rate, suggesting that government revenue will increase with tax rate only up to a certain point of time. 
• Hence, a government wanting to maximize its tax revenues must ascertain its optimal tax rate.

Laffer Curve

• The curvature of the Laffer curve indicates that as tax rates rise, so will tax revenue. However, these higher tax revenues will only continue until they reach a peak, after which they will start to drop. 

•  The curve was developed in 1979 by economist Arthur Laffer. 
• The curve begins at 0% taxation, with zero revenue, and then rises to maximum revenue at an intermediate rate of taxation, often known as the optimum tax rate, with maximum revenue, before falling to zero revenue at a 100% tax rate. 
• The shape of the Laffer curve is uncertain.

Criticisms of Laffer Curve

• Decreased taxation rates may raise income inequality.
• Besides taxation rates, the benefits system also influences work incentives.
• Tax rates have limited relevance to work incentives because numerous people are on zero-hours or fixed hours agreements.
• Lower taxation can cause few people to relax more than work, mainly at higher remuneration
•  or income.
• There is limited solid evidence of the highest income tax rates blocking the internal migration of skilled workers.