Laffer curve

The Laffer curve illustrates the relationship between tax rates and government revenue. At a 0 percent tax rate, the government collects nothing; at 100 percent, people have no incentive to earn taxable income, so it also collects almost nothing. Somewhere between, revenue is maximized, and above that point, raising rates would reduce revenue.

It is named for economist Arthur Laffer, who sketched it in the 1970s, reportedly on a napkin, though the idea has earlier roots in thinkers such as Ibn Khaldun and John Maynard Keynes. It became a symbol of supply-side economics under President Reagan, who argued that high marginal rates discouraged work and investment.

The logical point is not controversial. The disagreement is empirical: where the peak lies and whether current U.S. rates are above it. Most studies place the revenue-maximizing top income tax rate well above current levels, so that tax cuts lose revenue, though a fraction may be recouped through growth, as in dynamic scoring estimates. Supporters say that the curve shows that cuts can pay for themselves in some circumstances, especially for taxes on capital; critics say that it has been misused to claim that cuts always do so, with effects on the budget deficit.