What is The Laffler Curve?

The Laffler Curve is an economic theory that illustrates a relationship between tax rates and the amount of tax revenue collected by governments. The curve suggests that as tax rates increase from 0%, tax revenue will increase, but only up to a certain point. Beyond this point, further increases in tax rates will cause tax revenue to fall.

Why does this happen? Extremely high tax rates can discourage the taxed activity. In this simulation, a high tax on cigarettes makes it so expensive that:

• Fewer people buy cigarettes legally.
• An "underground" or black market emerges to sell untaxed cigarettes, which becomes more profitable as legal prices rise.

As a result, the government's tax base (the number of legally sold packs) shrinks so much that it collects less total revenue, even though the tax per pack is higher. This game lets you find the "sweet spot" for taxation!