The Laffer curve is an economic theory that compares the percentage of taxes collected with the amount that the government can obtain as public revenue.
This idea was developed by the economist Arthur Laffer, being an advocate that reducing the taxes charged to companies can increase the state’s income.
The theory explains that after a certain point, no matter how much the tax rate increases, it should generate less tax revenue.
Example of the Laffer curve
As an example, in the image above, if we consider that this graph can demonstrate the economy of a certain country, then the best rate will be a maximum tax rate of 55%.
If the government of this country requires more than 55% of the rate, it can decrease its collection instead of increasing it. This happens with the lower production of the companies or with the income they have and they are not declared.
If the tax rate is 0% or 100% there are no taxes. The first because quantity is not required and the second because no economic agent will be interested in producing.
If the percentage charged is 25%, the government of this country may increase even more, without prejudice to reducing the amount received.
The Laffer curve is used to explain the concept of ” elasticity of taxable income “, that is, the sensitivity of the country with the increase in taxes. The higher the sensitivity, the further to the left the peak of the graph will be.