Laffer Curve is the diagrammatic representation of the relationship between tax rates and the revenue generated from each tax rate. It is based on the premise that as there is a rise in tax rate, lower is the level of the activity undertaken and thus lower the resulting tax revenue generated from the given tax rate. Copy the link given below and paste it in new browser window to get more information on Laffer Curve:- http://www.transtutors.com/homework-help/economics/laffer-curve.aspx

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

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