Laffer Curve

The Laffer Curve shows an approximate relationship between government revenue from taxes and the tax rate. The negative parabolic shape shows that initially, as the tax rate increases, the government generates more and more revenue. But as the tax rate continues to go up, some people decide that the tax rate is, well, laughable, and either try to evade paying taxes or stop working because so much of their income is being taken by the government, thus reducing the overall government revenue.

Arthur Laffer drew up the curve on the back of a napkin when Gerald Ford's economic team wanted to increase government spending to boost spending. Laffer argued that it was the high taxes, not low income, that stopped people from spending. Later, Ronald Reagan used this idea to support his economic policies to greatly reduce taxes, which also led to a dramatic increase in government revenue.