The curve suggesting that tax revenue rises with tax rates before falling when rates become excessive is the Laffer curve.
The Laffer curve represents a theoretical relationship between a tax rate and the government revenue collected from it. At a zero tax rate, revenue is zero. Under the curve’s standard simplified assumptions, a very high rate can also reduce revenue by shrinking taxable activity through lower work, investment, production, or increased avoidance. Between those extremes lies a revenue-maximizing rate.
Economist Arthur Laffer popularized the idea in the United States, reportedly sketching it during a 1974 meeting involving Dick Cheney and Donald Rumsfeld. The basic logic predates that episode and has roots in earlier economic thought. The curve became closely associated with supply-side arguments for tax cuts.
The curve does not identify a universally correct tax rate, and its peak cannot be read directly from the diagram. The revenue-maximizing point depends on the tax base, taxpayer behavior, enforcement, deductions, economic conditions, and the time period studied. Thus, the curve’s general relationship is widely discussed, while claims about particular tax cuts raising revenue remain empirically disputed.