Let's discuss an important concept for economics, the Laffer Curve.

This concept is named after the man who developed it, Arthur Laffer, a major American economist

who has taught at the University of Chicago, University of Southern California, and elsewhere.

The Laffer Curve illustrates the two most important things we need to know about taxes.

How much money the government can raise from taxes and at what level of taxation the government

might start getting less, not more revenue.

The Laffer Curve is illustrated here by a two-dimensional graph.

The horizontal line is the tax rate that the government chooses, and the vertical line

is the revenue that the government receives from that tax rate.

First, because zero times any number is zero, if the tax rate is zero, then the government

receives zero revenue.

Accordingly, zero zero is our first point on the curve.

Now suppose the government chooses a very small tax rate, say 1%.

The government will then begin to receive some revenue from citizens.

This means that another point in the curve must be something like this.

Now suppose the government charges a 2% tax rate, then everyone would agree that it will

receive even more revenue, which means that another point in the curve must be something

like this.

And if the government keeps raising the rate, then revenue will continue to go up at least

when we're in the low tax rate part of the graph.

This means that if we fill in the curve, it has an upward slope, at least when we're

in the low tax rate part of the graph.

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