Glossary

Laffer Curve

The Laffer Curve states that the higher you set tax rates, the more you will receive in tax revenues until you hit a certain point. Thereafter, tax revenues will dwindle as tax payers lose the will to work harder.

There's nothing particularly complicated about the Laffer Curve. In fact, it's so easy to grasp, the man who came up with it in the 1970s, economist Arthur Laffer, first sketched it out on a cocktail napkin.

It may be simple, yet the Laffer Curve has been credited with inspiring Reaganomics the economic policies of American president Ronald Reagan and British prime minister Margaret Thatcher in the 1980s. The theory behind the Laffer Curve goes like this: the higher you set tax rates, the more you will receive in tax revenues until you hit a certain point. Thereafter, tax revenues will dwindle as tax payers lose the will to work harder.

Quite where the tipping point that maximises tax revenue lies has always been up for debate. Laffer would cut the top rate of income tax in America from 40% to 28% if he could, says Josh Glancy in The Sunday Times.

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