When You’re Right, Well, You’re Right: Laffer Curve

In this lesson, Dr. Laffer details the origins, practical uses, and theory behind the Laffer Curve. The Laffer Curve looks at the relationship between tax rates and tax revenues. The basic theory behind this relationship is that changes in tax rates have two effects on revenues: the arithmetic effect and the economic effect. The arithmetic effect is quite obvious: as tax rates are lowered, tax revenues are lowered by the amount of the decrease in the rate. The economic effect is less obvious: it recognizes the positive impact that lower tax rates have on work, output, and employment and thereby the tax base by providing incentives to increase these activities. The Laffer Curve has proved very successful in stimulating economic growth when applied in the real-world.

Link to article: The Laffer Curve