Question

i. Explain why an increase in rates of taxation may not necessarily lead to an increase in net revenue from taxation.
ii. Give an example of a real-world situation where a reduced tax rate led to an increase in taxation revenue.

Answer 1

i)

According to Laffer curve, Increase in tax rate does not necessarily mean that there shall be rise in tax revenue for government. Increase in taxes would mean that less encouragement for high income group to work on. Now high income people tend to divert their income towards the tax saving schemes. All these circumstances and action affect the tax revenue of government.

ii)

This is very much close to the real world. Fall in tax rates incentivse people to work more or work over time to earn money. Thus, it affects output, employments positively and there is significant rise in tax revenue of government.