Macro Foundations · intermediate

Supply-side tax cut toward the peak

What moves on the Laffer Curve diagram

Current tax rateshifts cut (small)

A rate cut raises revenue only if the economy starts beyond the revenue-maximising rate; below the peak, cuts reduce revenue. The empirical fight is over where the peak actually is.

Watch it animate Quiz yourself on Laffer Curve

Step by step

1
Start from a rate sitting near the top of the hill.
2
A tax cut moves the economy back down the rate axis.
3
Whether revenue rises or falls depends entirely on WHICH side of the peak you started: that is the whole Laffer debate.
4
From the peak's left side a cut loses revenue; from the right side it can genuinely raise it.

Where this shows up

Examiners ask this as: tax cut, supply side, reagan, incentives, cut rates.

Other scenarios on Laffer Curve

Rates pushed past the revenue peak →Crackdown on avoidance and evasion →