Economics Made Economical

Tip of the Day 13: The Laffer Curve

The Laffer Curve is a graph that compares federal tax rate to government income from the tax. It is most often shaped like an upside-down parabola, with a maximum point shown at the 50% tax rate. The Laffer Curve is important because it demonstrates that higher tax rates often end up being counterproductive as more people have less of an incentive to work. In the most extreme example of this, a federal income tax of 100% wouldn’t maximize the government’s revenue; it would cause 100% of society to stop working and the government’s income tax revenue would be 0.


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