The Laffer Curve depicts a hypothesized relationship between a tax rate and the total tax revenue it collects: revenue is zero at both a 0 percent rate and a 100 percent rate, and some intermediate rate maximizes revenue, so that above that maximizing point a further rate increase can reduce total revenue by discouraging the taxed activity enough to shrink the base faster than the higher rate expands collections. Arthur Laffer popularized the idea, reportedly first sketching it on a restaurant napkin in 1974 for Reagan administration officials, and it became a central argument for supply-side tax cuts in the 1980s. Whether actual tax rates in practice sit on the curve's revenue-losing side, so that cutting them would raise revenue, is a live dispute: a 2012 University of Chicago IGM Forum survey of leading economists found essentially no support for the claim that cutting federal income tax rates would raise revenue within five years.
Facts
FieldPublic finance and tax policy 2 Origin Year1974 is the year commonly given for Laffer's napkin sketch for Reagan-administration officials Dick Cheney and Donald Rumsfeld, popularizing the idea, though the underlying logic (zero revenue at 0% and 100% tax rates) predates him. Disputed
SignificanceBecame the central intellectual argument for supply-side income tax cuts in the Reagan era and remains a live flashpoint between supply-side economists and the mainstream consensus over whether real-world tax rates are high enough for a cut to pay for itself. 2 Whether real-world tax rates actually sit on the curve's revenue-losing side, so a cut would raise revenue, is genuinely disputed; see the dissent from John Quiggin below. Classification
Concept Form Connections
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Sources
1. Laffer curve (Wikipedia)
lead paragraph, sentence beginning: In economics, the Laffer curve illustrates a theoretical relQuote, lead paragraph, sentence beginning: In economics, the Laffer curve illustrates a theoretical rel
In economics, the Laffer curve illustrates a theoretical relationship between rates of taxation and the resulting levels of the government's tax revenue.
2. Wikipedia
Wikimedia FoundationArthur Laffer, Laffer curve
He is best known for developing the Laffer Curve
Arthur Laffer, Criticism and Controversy
None of the economists surveyed agreed and 71% disagreed that cutting federal income tax rates would raise revenue within five years.
Associated With: Supply-Side Economics, Arthur Laffer, Role as Reagan Advisor and Supply-Side Economics
is associated with supply-side economics
View the Source Open Questions (1 open question)
Does cutting tax rates below their observed real-world range actually raise government revenue, as the Laffer Curve implies is possible?
The Laffer Curve's logic (zero revenue at 0% and 100% tax rates, so some intermediate rate maximizes revenue) is not itself disputed, but whether actual, real-world tax rates sit on the curve's revenue-losing side, so that a cut would pay for itself, is a live empirical dispute between supply-side economists and the mainstream consensus. A 2012 University of Chicago IGM Forum survey of leading economists found essentially no support among them for the claim that cutting federal income tax rates would raise revenue within five years.
What would resolve this A settled empirical estimate of where actual tax rates sit relative to the revenue-maximizing point, which depends on contested behavioral-response (elasticity) estimates that differ sharply between supply-side and mainstream public finance economists.
Public finance and empirical tax policy economicsWikipedia
Dissenting Readings (1 dissenting reading)
Significance
Economist John Quiggin has argued that Laffer's underlying analysis, not merely its application to any one country's tax rates, "was original but incorrect": the claim that a broad, economy-wide income tax cut can pay for itself through the resulting growth in taxed activity is not supported by the elasticity of taxable income actually observed in modern economies, a position shared by the near-unanimous 2012 IGM Forum panel of leading academic economists who rejected the claim that cutting federal income tax rates would raise revenue within five years.
A dissenting reading, from John QuigginWikipedia, Wikimedia Foundation
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