Back when I was a very young man, my Daddy told me
a story. He had retired from the Navy, and was
working as a 'Go-fer' for an electrical contractor.
If one of the electricians made too much overtime,
it would kick them into a higher tax bracket and
actually reduce the size of their paycheck. So, the
secretary would watch their hours, and warn them if
they were getting too close to the mark. So they
could go home rather than seeing a pay cut.
The curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T*) would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually, if tax rates reached 100% (the far right of the curve), then all people would choose not to work because everything they earned would go to the government.
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