The Laffer Curve

The Laffer Curve illustrates the relationship between tax rates and government revenue. It suggests that at a 0% tax rate, the government earns no money, and at a 100% tax rate, it also earns nothing because people have no incentive to work or earn income. There’s an optimal tax rate in between where revenue is maximized. Increasing taxes beyond that point can actually reduce total revenue because high rates discourage work and investment. The curve helps policymakers consider how adjusting tax rates can influence economic activity and government income.