Laffer Curve

At a tax rate of 0%, the government collects no revenue. At 100%, there would be little incentive to earn taxable income, so revenue would also be close to zero. Somewhere in between lies a rate that raises the most revenue.

The idea is associated with economist Arthur Laffer, who popularised it in the 1970s, although the concept is much older. It became influential in supply-side economics and US tax policy in the 1980s.

For example, if a very high top tax rate causes wealthy people to move income abroad, delay selling assets or work less, cutting that rate could, in principle, increase revenue.

The Laffer curve is widely accepted in principle, but there is much debate about where actual tax rates sit on it. Most economists believe that, for most taxes in most countries, rates are below the revenue-maximising level, so tax cuts usually reduce revenue rather than increase it, although the effect depends on the tax and the behaviour of taxpayers.