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Laffer Curve

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The Laffer Curve is a mathematical shape that shows the relationship between tax rates and the revenue governments collect from those taxes. The Laffer Curve is shaped like an upside down U. The Laffer Curve is not fixed, however. The Laffer Curve shows that as tax rates rise, tax revenues increase. They reach a critical high point, called T*, where the maximum amount of tax revenue is reached for the maximum tax rates possible. After this point, both tax rates and revenue drop. The T* location suggests that at this point, people become increasingly unwilling to pay taxes. The location of the T* point along the Laffer Curve varies according to economic conditions. Economist Arthur Laffer invented the Laffer Curve.

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