What is the Laffer Curve?

The Laffer curve is a representation of what it means to implement a impuesto and the level of collection or income obtained through it. It is a concept of the economist Arthur Laffer (in 1980) who, during the presidency of Ronald Reagan, advised that it would allow freeing the individual initiative of the population.

What is the Laffer curve like?

This curve has an inverted U shape in which there is a percentage level that varies between 0 and 100. At such a percentage level (0 and 100) it is not collected, since, if no one contributes, the rate taxes the entire salary and he would not be interested in working.

Laffer Curve

Image: Bastianowa.

What is the explanation for the Laffer curve?

The explanation of the Laffer curve assures us that for a tax rate of 0 and 100, the collection is zero. In the first case, because no taxes are collected; in the second because if such a high tax rate is applied, no one would be willing to work for having to give all the money in the collection (what we have explained above)

Well, Laffer's explanation is that between these two points there is an upward journey in the curve in which there are low levels of taxes and a downward path with higher levels (and therefore, more collection).

The maximum that can be established depends on many factors, and may vary by country. It is very important to find it, as it allows governments to establish one tax rate or another, as well as determine the corresponding fiscal policy.

Tax rate and work relationship

As we have indicated, if there is a high tax rate (or 100%), the percentage of people who would work would be zero or low.

This is because individuals do not see the utility of investing and finding work, prioritizing leisure instead in the event that the tax rate does not decrease. Therefore, it can be concluded although not in an exact and objective way that, if the tax rate increases, the work of a certain country tends to decrease. The same thing happens in reverse, if the tax rate is lower.

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