The Laffer Curve illustrates the relationship between government revenue and tax rates, depicting an inverse U-shape where revenue is generated at both 0% and 100% tax rates due to a lack of economic activity. Originating from economist Arthur Laffer in 1974, the theory suggests that there is an optimal tax rate for maximizing revenue, which differs from the optimal tax rate for overall economy efficiency. While tax cuts under President Reagan increased government revenue, economists remain divided on the Laffer Curve's predictive validity, as recent models indicate varying potential outcomes.

2. What is Laffer curve?
• Diagrammatic presentation of relationship between government
revenue and tax rates
• Inverse U shape

3. Shape of Laffer curve explained
• At 0% tax no revenue generated
• At 100% tax, economic activity falls to zero and as a result no
revenue generated from taxes
• Two effects at work:
1. Mathematical Effect
2. Economic Effect
• Helps to find revenue maximizing tax rate, may be different from
optimal tax rate
• At tax rates less than optimum, increase in tax increases revenue
generated
• At tax rates more than optimum, increase in tax rates decreases
revenue generated

4. Origin of Laffer Curve
• Named after Arthur Laffer
• He first drew it on a paper napkin during a meeting in 1974
• The concept was not discovered by him, the name was coined by
Jude Wanniski in his article

5. Discredited
• Neither have the benefits from tax cuts have not been as high as
predicted by the Laffer curve nor have the effects of tax increases
been as disastrous as predicted by the concept
• In a survey conducted of economists from University of Chicago,
71% disagreed that tax rates cuts lead to increase in tax revenue
• Tax cuts under President Regan led to significant increase in
government revenue, but it is the monetary policy of the time
that was responsible for this increase and not the tax rate cuts
• Recent mathematical models show that continuously upward
sloping Laffer curves are possible, however it is not known if the
assumptions of such models hold true in the actual economy

6. Hey Friends,
This was just a summary on Laffer Curve. For more
detailed information on this topic, please type the link
given below or copy it from the description of this PPT and
open it in a new browser window.
http://www.transtutors.com/homework-
help/economics/laffer-curve.aspx