Lesson 12 - CH 18 & 19: The Laffer Curve PDF

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1. What is the Laffer Curve, and how does it relate to supply-side economics? Why is determining the location where the economy is on the curve so important in assessing tax policy?...

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Emily Kilker ECON 202 D01 04/30/2020 Lesson 12 – Chapter 18 & 19 1. What is the Laffer Curve, and how does it relate to supply-side economics? Why is determining the location where the economy is on the curve so important in assessing tax policy? The Laffer Curve depicts the relationship between tax rates and tax revenue. It shows that there is a maximum tax rate that will maximize tax revenue. If the tax rate rises above the optimal level, tax revenues actually decline as the higher tax rates discourage economic activity. Taxes can be used to encourage people to work, save, and invest. Supply-side economics suggests that changes in aggregate supply determine levels of inflation, unemployment, and economic growth. The Laffer Curve suggests that lower tax rates boost economic growth by demonstrating how cutting tax rates can increase total tax revenue. Determining the location where the economy is on the curve is important in assessing tax policy because tax rates should rise below the maximum and fall after the maximum. It helps to determine whether an economy should increase or decrease tax rates to increase tax revenue and hopefully achieve maximum tax revenue....