Laffer Curve
On a napkin in a Washington restaurant in 1974, Arthur Laffer famously drew his hump-shaped curve showing tax revenue as a function of the tax rate (see Figure 1). Revenue is zero both when the tax rate is zero and when the tax rate is 100 per cent or mor
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Laffer curve On a napkin in a Washington restaurant in 1974, Arthur Laffer famously drew his hump-shaped curve showing tax revenue as a function of the tax rate (see Figure 1). Revenue is zero both when the tax rate is zero and when the tax rate is 100 per cent or more. In between must be some t* that maximizes revenue. The point is that taxes discourage supply of labour, especially by secondary workers in the family who have elastic behaviour, and
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t* Figure 1
The
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they discourage supply of capital over time. Thus, proponents became known as 'supply siders'. So far, these points were well accepted, as economists are quite familiar with the idea of supply as well as demand. Even as far back as 1776, Adam Smith understood that 'High taxes, sometimes by diminishing the consumption of the taxed commodities, and sometimes by encouraging smuggling, frequently afford a smaller revenue to government than what might be drawn from more moderate taxes' (Smit
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