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Using the Laffer curve, explain why higher taxes can imply lower government revenue.Should the government aim...

Using the Laffer curve, explain why higher taxes can imply lower government revenue.Should the government aim to maximize its tax revenue? (5%)

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Answer #1

According to the Laffer's curve, the tax revenues will reach a maximum and then start declining as shown in the diagram. This could be because when tax rate increases beyond a certain level, people will prefer not to pay taxes as it will create disincentives and people might try doing tax evasion in order to escape paying larger amount of taxes, it also creates disincentive to work less.

Therefore, if the government want to maximize tax revenue they should try to be at the point shown above on the laffer's curve, so government should aim to maximize tax revenue and they need not increase the tax rate for that, at the optimal tax rate, tax revenue would be the highest.

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