Question
Which of the following curve shows that incessant
increase in tax rates is not productive?Solution
- The Laffer curve shows the relationship between tax rates and tax revenue collected by governments.
- The curve suggests that, as taxes increase from low levels, tax revenue collected by the government 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.
- Eventually, if tax rates reached 100% (the far right of the curve), then all people would choose not to work because everything they earned would go to the government.
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