Laffer Curve
Also known as: Laffer's Curve, Tax Revenue Curve
Formulated by Arthur Laffer (1974)
Definition
The Laffer Curve is an economic model illustrating the relationship between tax rates and the total tax revenue collected by governments. It shows that tax revenue is zero at a 0% tax rate (no tax collected) and at a 100% tax rate (no incentive to earn taxable income), with revenue rising from zero, reaching a maximum at some intermediate rate, then declining as rates approach 100%. The core insight is that raising tax rates beyond a certain point can be self-defeating: higher rates discourage work, investment, and reported income enough that total revenue falls even as the rate itself rises. Popularized by economist Arthur Laffer, who reportedly sketched the curve on a napkin during a 1974 dinner with Dick Cheney and Donald Rumsfeld, the concept became a foundation of supply-side economics and was influential in the tax-cutting policies of the Reagan administration. Critics note that the curve's exact shape and the location of the revenue-maximizing rate are difficult to measure empirically and vary by country, tax type, and time period.