Laffer Curve

The Laffer Curve is a concept in economics that illustrates the relationship between the level of taxation and the amount of revenue the government can collect. The curve is typically represented as an arch-shaped graph: revenue initially increases as tax rates rise, but only until a certain threshold. If tax rates become excessively high, individuals and businesses may reduce their economic activity, shift income, or avoid taxes altogether, which leads to a drop in total revenue. At one extreme—0%—the government receives no revenue, and at the other extreme—100%—there is no motivation for anyone to earn taxable income. The point at which the curve peaks indicates the tax rate that yields the greatest revenue.

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For example, if a government lowers an extremely high tax rate (for instance, from 70% to 50%), the reduced burden might encourage people to report more income or participate more actively in the economy, potentially increasing overall revenue even though the rate is lower.