Definition
Laffer Curve
The Laffer curve illustrates that tax revenue rises with tax rates up to a point, then falls as excessive rates discourage work and investment, implying an optimal rate exists.
The Laffer curve argues both 0% and 100% tax rates raise no revenue, so somewhere between lies a revenue-maximising rate. Beyond that peak, raising rates further actually shrinks the tax take by dampening activity.
It is invoked in Indian debates over income-tax and corporate-tax rates, for instance the 2019 corporate tax cut aimed at boosting investment and, eventually, revenue. Critics note the peak rate is hard to identify and the curve oversimplifies real-world tax behaviour.
Related terms
- Fiscal PolicyFiscal policy is the government's use of taxation and spending decisions, set out mainly in the Union Budget, to influence the economy.
- Effective Tax RateThe effective tax rate is the actual percentage of your total income that you pay as tax, after slabs, deductions, surcharge and cess.
- Comparative AdvantageComparative advantage is the principle that countries gain by specialising in goods they produce at the lowest opportunity cost and trading for the rest, even if one is better at everything.
- Crowding OutCrowding out is when heavy government borrowing soaks up available funds and pushes up interest rates, leaving less and costlier credit for private businesses.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.