LAFFER CURVE

Have you ever wonder that when a government of a country raises the tax rates, then this results in decline in the tax revenue collected, Laffer Curve explains this.

The concept of Laffer Curve was coined by a supply-side economist Arthur Laffer to illustrate the relationship between Tax rates and Tax Revenue collected by government.

The concept of Laffer Curve can be expressed mathematically as 

                                                                    TR= t X Tax base         

 Here, TR means Tax Revenue           

           t means   Tax Rate                              

This hypothetical data helps to understand the concept of Laffer curve

Tax Rates (in %)	Tax Revenue (in $)
10	$500
20	$1000
30	$2000
40	$3000
50	$4000
60	$3500
70	$3000
80	$2500
90	$1000
100	$400

Inverted U shape Curve

Here, tax rate and tax revenue are measured along the horizontal and vertical axis respectively.

From the data it can be observed that, initially the revenue rises with an increase in tax rate. Sometimes, a decrease in tax rate leads to an increase in tax revenue. Laffer Curve is inverted U shaped curve indicating that after a optimum revenue point (here that optimum revenue point is $4000) the tax revenue falls as now the tax rates has risen up.

This implies that 

1. People's incentive to work becomes low as now they have to pay more part of their income earned as tax to the government.
2. There will be an increase in tax evasion as people will try to evade from paying tax in order to maintain a stable consumption level they will not pay increased taxes.
3. More emigration will happen.