Laffer Curve

The Laffer Curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. It suggests that there is an optimal tax rate which maximizes government revenue without overburdening taxpayers. The curve is named after economist Arthur Laffer, who proposed the concept in the 1970s.

In the formula, R represents the government revenue as a percentage of the maximum possible revenue, and t is the tax rate as a percentage. The relationship assumes that a tax rate of 0% would collect no revenue, and a tax rate of 100% would also collect no revenue because individuals would be disincentivized to work or hide income. Revenue is maximized at some point between these extremes. The formula uses the natural exponential function e to model the decrease in revenue as tax rates approach 100%.