Question

Which one of the following is correct, according to Arthur Laffer and the Laffer Curve?

When income tax rates are high, the government should lower tax rates in order to raise more revenue.

When income tax rates are low, the government should lower tax rates in order to raise more revenue.

At any income tax rate level, the government should lower tax rates in order to raise more tax revenue.

When income tax rates are high, the government should raise tax rates in order to raise more revenue.

At any income tax rate level, the government should raise tax rates in order to raise more tax revenue.

Answer 1

The laffer curve ia a theory developed by supply side economist Arthur Laffer to show the relationship between tax rates and the amount of tax revenue collected by governments.

The laffer curve suggest that, as taxes increase from low levels , tax revenue collected by govt also increases. It also shows that tax rates increasing after a certain point (T*) would cause people not to work as hard or not at all ,thereby reducing tax revenue.Govt would like to be at point T* because it is point at which the govt collects maximum amount of tax revenue while people continue to work hard.

So, when income tax rates are high, the govt should lower tax rates in order to raise more revenue.