The principles explained by the Laffer curve in finance

The Laffer Curve depicts the relationship between the government's tax revenue and the tax rate. When the tax rate is below a certain limit, increasing the tax rate can increase the government's tax revenue. However, when it exceeds this limit, the tax rate is increased again. Instead, it leads to a reduction in government tax revenue. Because a higher tax rate will inhibit economic growth, reduce the tax base, and reduce tax revenue. On the contrary, tax cuts can stimulate economic growth, expand the tax base, and increase tax revenue.

Generally, raising tax rates can increase government tax revenue. However, when the tax rate increases beyond a certain limit, the operating costs of enterprises increase, investment decreases, and income decreases, that is, the tax base decreases, which in turn leads to a decrease in government tax revenue, which is called the Laffer Curve.

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When American economist Arthur Laffer proposed the Laffer Curve in the 1970s, he believed that the marginal tax rate in the United States at that time (about 50 %) has exceeded the limit and is on the downward side of the curve, so he advocates government tax cuts.

But many other economists believe that there is no evidence that the U.S. tax rate has reached such an extreme level. Reagan had personal experience with the Laffer Curve. When Reagan was an actor in the 1940s, he completed four movies a year. After the movie, I stopped working and chose to take vacation, because most of the income from continuing to work will be used to pay taxes.

When Reagan entered the White House in 1981, he implemented the largest tax cut in American history. But the reality is that although the U.S. economy has grown, government tax revenue has declined, resulting in a huge fiscal deficit during the Reagan era. During the same period, Sweden's marginal tax rate was as high as 80%. Most economists believe that it is on the wrong side of the Laffer Curve. Lowering the tax rate can increase the Swedish government's tax revenue.

Baidu Encyclopedia-Laffer Curve