THE variably shape justified of the Laffer in the curve following is invariably justified in he fo owing manner: the tax rate is zero, then tax revenues are zero; if the tax rate is one, nobody will want to demand or supply the good in question, so the tax revenue is also zero. Thus , revenue as a function of the tax rate must first increase and eventually decrease (Varian, 1987, p. 284, emphasis added). This argument, however, is logically flawed. The fact that the tax revenue is zero at the tax rates of zero and one does not imply that the tax revenue function must be decreasing over some interval of the possible set of values of the tax rate. Logically, it is quite possible for the tax revenue to continue to increase as the tax rate increases, as long as the tax rate remains below one (even by an infinitesimal amount). When the tax rate equals one, the tax revenue falls all the way down to zero. This will occur if the Laffer curve has a discontinuity at the tax rate of one.1 To understand the intuition behind this result, consider a change in the wage tax rate. This will, in general, have a substitution and an income (due to the tax) as well as a effect (due to the concomitant change in the government expenditures) on the supply of labor.2 If the government expenditures take the form of cash rebates, the income and the budget effects essentially wash out.3 When this happens, labor supply will have to go down as the wage tax rate increases. It is then quite natural for the tax revenue (the product of the tax rate and the labor supply) to start going down at some point as the tax rate keeps increasing. On the other hand, if the government uses the tax revenues to finance the provision of some good, the income and the budget effects will not in general wash out.4 This is so because the budget may not be