3. This question concerns government and the Laffer Curve.

a. Draw the Laffer Curve (with the correct axes) and explain what it means to “be on the wrong side of the Laffer Curve.” (2 points)

b. When the following statement is made: “we want to broaden the base and lower the rates,” explain the impact of this on the taxes paid of high income people. (2 points)

c. In order for tax cuts to increase revenue, explain what has to be true of the labor supply elasticity and why. (3 points)

d. What is the evidence on labor supply elasticity and what does this imply about income and substitution effects? (3 points)

e. Explain, briefly, why tax cuts tend to increase government budget deficits and tax increases tend to lower them. (2 points)