172PART THREESUPPLY AND DEMAND II: MARKETS AND WELFARECASE STUDYTHE LAFFER CURVE AND SUPPLY-SIDE ECONOMICSOne day in 1974, economist Arthur Laffer sat in a Washington restaurant withsome prominent journalists and politicians. He took out a napkin and drew afigure on it to show how tax rates affect tax revenue. It looked much like panel(b) of our Figure 8-7. Laffer then suggested that the United States was on thedownward-sloping side of this curve. Tax rates were so high, he argued, that re-ducing them would actually raise tax revenue.Most economists were skeptical of Laffer’s suggestion. The idea that a cutin tax rates could raise tax revenue was correct as a matter of economic theory,but there was more doubt about whether it would do so in practice. There waslittle evidence for Laffer’s view that U.S. tax rates had in fact reached such ex-treme levels.Nonetheless, the Laffer curve(as it became known) captured the imaginationof Ronald Reagan. David Stockman, budget director in the first Reagan admin-
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Supply-side economics, Laffer curve, Arthur Laffer