Laffer Curve – Economy UPSC Notes

Laffer Curve – Economy UPSC Notes

✅ Laffer Curve – Complete UPSC Notes ➤ Definition The Laffer Curve is an economic theory that shows the relationship between the tax rate (%) and the tax revenue collected by the government . It explains that: At 0% tax rate → Tax revenue = ₹0 (because no tax is collected). At 100% tax rate → Tax revenue = ₹0 (because people stop earning or hide income). There is an optimal tax rate where tax revenue is maximum . The Laffer Curve is an economic theory that illustrates the relationship between the tax rate and the tax revenue collected by the government. It shows that as the tax rate increases from 0%, tax revenue increases up to a certain point (the optimal tax rate). Beyond this point, further increases in tax rate cause tax revenue to decline, because high taxes discourage work, investment, and reporting of income, leading to tax avoidance or evasion. The curve highlights the importance of setting a balanced tax rate to maximize revenue without harming economic activity. ➤ Shape of the Curve …