Laffer Curve Tax Revenue Calculator

The Laffer curve illustrates that tax revenue is zero at two extremes: a 0% rate (no tax collected) and a 100% rate (no one works or reports income). Somewhere between is a revenue-maximizing rate.

The model used here:

R(t) = B x t x (1 - t)^epsilon

where t is the tax rate from 0 to 1, B is the pre-tax tax base, and epsilon is the supply-side elasticity. The elasticity measures how strongly economic activity contracts in response to higher tax rates.

Revenue-maximizing rate:

t* = 1 / (1 + epsilon)

With epsilon = 1 (moderate supply response), the optimum is t* = 50%. With epsilon = 0.5, it is 67%. With epsilon = 2, it drops to 33%.

Interpreting elasticity. A low elasticity (0.1-0.3) means the tax base is relatively unresponsive. People work the same hours and report the same income regardless of the rate. High elasticity (1-3) implies strong behavioral responses: people work less, shift income to lower-taxed forms, or evade. Labor supply elasticity from empirical research typically ranges from 0.1 to 0.5 for prime-age workers.

What the Laffer curve does not say. It says there exists a revenue-maximizing rate. It does not say current tax rates are above that peak. Whether cutting taxes raises revenue depends on where you are on the curve. Most economists believe US federal income tax rates are on the left (increasing) side of the Laffer curve, meaning cuts reduce revenue at current rates.