The Laffer Curve

Arthur Laffer was an American economist for Ronald Reagan.  He is of the Austrian school of thought on economics and is credited with being a key figure in supply-side economics.


Laffer came up with a theoretical mathematical relationship between the tax rate and government revenue.  Laffer started his theory by saying that the government would collect no revenue if the tax rate was 0%, which is just common sense.  The brilliance of his theory though, comes from the fact that he also theorized that the government would collect no revenue at  a 100% tax rate.  But Eddie! If government revenue is a function of the tax rate, then that means that the relationship can be expressed in the form f(x)=kx making it a linear function whose limit is infinity!  This would hold true in a perfect world, but Laffer realized that at a 100% income tax, any rational person would no longer work because the government would sieze anything they made, making their work useless.  He then postulated that the ideal tax rate must then lay somewhere on the interval (0%,100%).  Notice that this is not inclusive.  Although it the Laffer curve is usually expressed as a parabola with its vertex at x=50%, Laffer believed that the ideal tax rate is most likely significantly lower than this.