Question

3. What should a government do if it is on the “wrong” side of the Laffer curve? Looking online, try to find an example of when a county or state was on the “wrong” side of the Laffer curve.

Answer 1

Laffer curve shows the relationship between Tax rates and tax revenues.

It states how tax rates must be set such that tax revenues are maximized.

It follows an inverted U shape. That is, initially, as tax rates increase, tax revenues also increase. However, post reaching a maximum, Increasing tax rates lead to fall in tax revenues.

If the government is on the wrong side or the left side of the maximum of Laffer curve, it must keep on increasing taxes as it would lead to increasing tax revenues.

Thus, in such cases government must increase tax rates.