The Laffer curve is the graphical representation of the relationship between tax rates and absolute revenue these rates generate for the government. The principle thought behind the Laffer curve is that a zero tax rate would produce zero revenue and a 100% tax rate would also generate zero revenue, as there would be no incentive to work. This means there must be an optimal tax rate that will yield maximum revenue for the government.
Economist Arthur Laffer discovered this relationship that came be known as the Laffer curve. It is based on the idea that at a particular tax rate evasion will make no sense as the cost, in terms of the money and time going into it, would be higher than benefits.
There are two effects that come into play whenever the tax rates are changed — the arithmetic and the economic effect. Simple mathematics says that other things being equal, if tax rates are lowered, tax revenues will drop in the same proportion.
Any increase should also make collections grow, but this happens only up to a point. Economic effect works at a more subtle level and recognises that an unduly high tax rate will mean people will be less inclined to work or will look for ways to avoid taxes. For instance, individuals and companies could think of moving their assets and business to a less taxing jurisdiction. Therefore, arithmetic logic of higher rate leading to greater collections is countered by be adverse economic effects.
Economist Arthur Laffer discovered this relationship that came be known as the Laffer curve. It is based on the idea that at a particular tax rate evasion will make no sense as the cost, in terms of the money and time going into it, would be higher than benefits.
There are two effects that come into play whenever the tax rates are changed — the arithmetic and the economic effect. Simple mathematics says that other things being equal, if tax rates are lowered, tax revenues will drop in the same proportion.
Any increase should also make collections grow, but this happens only up to a point. Economic effect works at a more subtle level and recognises that an unduly high tax rate will mean people will be less inclined to work or will look for ways to avoid taxes. For instance, individuals and companies could think of moving their assets and business to a less taxing jurisdiction. Therefore, arithmetic logic of higher rate leading to greater collections is countered by be adverse economic effects.
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