1. During the Reagan administration, economist Arthur Laffer argued in favor of lowering income tax rates in order to in- crease tax revenues. Like most economists, he believed that at tax rates above a certain level, tax revenue would fall because high taxes would discourage some people from working and that people would refuse to work at all if they received no in- come after paying taxes. This relationship between tax rates and tax revenue is graphically summarized in what is widely known as the Laffer curve. Plot the Laffer curve relationship assuming that it has the shape of a nonlinear curve. The fol- lowing questions will help you construct the graph.
a. Which is the independent variable? Which is the depend- ent variable? On which axis do you therefore measure the income tax rate? On which axis do you measure income tax revenue?
2.a. In panel (a), what is the slope of the line? Show that the slope is constant along the line.
b. In panel (b), what is the slope of the line? Show that the slope is constant along the line.
