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Laffer Curve


A Laffer curve is a hump-shaped curve showing tax revenue as a function of the tax rate. Revenue initially increases with the tax rate but then can decrease if taxpayers reduce market labour supply and investments, switch compensation into non-taxable forms, and engage in tax evasion. The revenue-maximizing tax rate can be calculated from an estimate of the elasticity of taxable income with respect to the after-tax share. Some studies find this elasticity to be near zero, and others find it to exceed 1. The mid-range for this elasticity is around 0.4, with a revenue peak around 70 per cent.


  • Capital supply
  • Elasticity of labour supply
  • Elasticity of taxable income
  • Excess burden of taxation
  • Home production
  • Income effect
  • Labour supply
  • Laffer curve
  • Leisure
  • Marginal and average tax rates
  • Progressive and regressive taxation
  • Revenue maximization
  • Substitution effect
  • Supply side economics
  • Tax avoidance
  • Tax compliance
  • Tax evasion
  • Tax revenue
  • Taxation of corporate profits
  • Taxation of income

JEL Classifications

  • H2

This chapter was originally published in The New Palgrave Dictionary of Economics, 2nd edition, 2008. Edited by Steven N. Durlauf and Lawrence E. Blume

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Fullerton, D. (2008). Laffer Curve. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London.

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