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Calculating the location in assessing tax policy

Why is calculating the location where the economy is on the curve so significant in assessing tax policy?

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The complicated decision involves the analysis to find out what is the optimum tax rate for creating maximum tax revenue and the associated maximum economic output level. Laffer argued that low tax rates would in fact increase revenues since low rates enhanced productivity, saving and investment incentives. The expansion in output and employment and therefore, revenue, would more than compensate for the lower rates.

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