Quiz 19: Policies for Intermediate-Run Growth


The Laffer curve shows the relationship between tax revenue and tax rates with tax revenue plotted on the vertical axis and tax rates on the horizontal axis.It can be seen that the curve will first rise as the tax rate moves up from zero,but at some point (say t1)the curve begins to fall.Assuming that taxes were to rise to 100 percent of income,then all incentives to produce and work would be taken away and tax revenues would be zero.Alternatively,if the tax rate were zero percent of income,then there would be incentives to work and produce output since no taxes were being paid.The Laffer curve illustrates the possibility that increases in tax rates may reduce tax revenues.Alternatively,a cut in tax rates may increase tax revenue.This will occur if tax rates are initially to the right of t1.If tax rates are to the left of t1,then a tax increase actually reduces tax revenues.This implies that a reduction in tax rates will increase tax revenue.

People use the term "New Economy" to refer to the fact that labor productivity and output growth was higher during this period than it was during the previous 20 years.The development of information technologies is the most often mentioned cause of this increase in labor productivity growth.However,when looking at the 1992-2002 data from a historical perspective,we see that it has failed to live up to the 1960-1968 data across every category,raising questions about just how "new" this economy really is.

After-tax nominal return= [8 percent (1 − twh)= 8 percent (1 − 0.25)] = 6 percent After-tax real return= 6 percent − 3 percent = 3 percent It is after-tax real returns that influence savings and investment decisions.