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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Bitcoin hits new heights - is now a good time to invest?
The value of Bitcoin has surged to a 20-month high. Why is Bitcoin rising and is now a good time to invest?
By Vaishali Varu Published
-
Gold hits record high - could it soar higher next year?
The yellow metal has hit a new all-time high. We look at market expectations for 2024, whether investors should sell and take profits, and how to invest in gold.
By Ruth Emery Published