FinTech Glossary

What Is the Laffer Curve

The Laffer Curve is an economic concept that illustrates the relationship between tax rates and tax revenue, suggesting that beyond a certain point, higher tax rates can lead to lower total tax revenue.

Understanding the Laffer Curve

The Laffer Curve is used in public finance and tax policy discussions.

It proposes that both extremely low and extremely high tax rates can result in limited tax collection.

The theory highlights how taxpayer behaviour may change in response to tax rates.

How the Laffer Curve Works

At low tax rates, government revenue is low because taxes collected per unit are minimal.

As tax rates increase, revenue rises up to an optimal point.

Beyond this point, higher tax rates may discourage work, investment, or compliance, reducing overall tax revenue.