Laffer Curve

• It is a trade-off between tax rates and government revenue
• Used to support the supply side argument
• As tax rates increase from 0, tax revenues increase from 0 to some maximum level, then decline.

Criticisms of the Laffer Curve

• Research suggests that the impact of the tax rates on incentives to work, save and invest are small.
• Tax cuts also increase demand, which can fuel inflation, which will cause demand to exceed supply
• Where the economy is actually located on the curve is difficult to determine