The Laffer Curve by Wikipedia
In economics, the Laffer curve (sometimes referred to as the Laffer-Khaldun
curve) is a hypothetical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. It is used to illustrate the concept of taxable income elasticity – that taxable income will change in response to changes in the rate of taxation. The Laffer curve postulates that no tax revenue will be raised at the extreme tax rates of 0% and 100%. If both a 0% and 100% rate of taxation generate no revenue, but some intermediate tax rate generates some tax revenue, it follows from the extreme value theorem that there must exist at least one rate where tax revenue would be a non-zero maximum. The Laffer curve is typically represented as a graph which starts at 0% tax with zero revenue, rises to a maximum rate of revenue at an intermediate rate of taxation, and then falls again to zero revenue at a 100% tax rate.
One potential result of the Laffer curve is that increasing tax rates beyond a certain point will be counterproductive for raising further tax revenue. A hypothetical Laffer curve for any given economy can only be estimated and such estimates are controversial. The New Palgrave Dictionary of Economics reports that estimates of revenue-maximizing tax rates have varied widely, with a mid-range of around 70%.
The Laffer curve is associated with supply-side economics, where its use in debates over rates of taxation has also been controversial. The Laffer curve was coined by journalist Jude Wanniski in the 1970s, with Wanniski naming the curve after an idea sketched on a napkin in a restaurant by Arthur Laffer. Laffer later pointed out that the concept was not original, noting similar ideas in the writings of both 14th century Muslim philosopher Ibn Khaldun (who discussed the idea in his 1377Muqaddimah) and John Maynard Keynes. Numerous other historical precedents also exist.
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