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    Question

    The 'Laffer Curve' is conceptually related to the debate

    on:
    A The optimal level of public expenditure Correct Answer Incorrect Answer
    B The relationship between tax rates and tax revenue Correct Answer Incorrect Answer
    C The incidence of indirect taxes Correct Answer Incorrect Answer
    D The burden of public debt Correct Answer Incorrect Answer
    E The progressivity of income tax Correct Answer Incorrect Answer

    Solution

    The Laffer Curve is an illustration of the hypothetical relationship between tax rates and total tax revenue collected by the government. It suggests that at a 0% tax rate, revenue is zero. As rates rise, revenue increases. However, beyond a certain optimal point, very high tax rates discourage work, investment, and compliance (leading to tax evasion). This disincentive effect can shrink the tax base (total income/activity being taxed) so much that further increases in the tax rate actually led to a decrease in total tax revenue. It is central to debates about the revenue effects of tax cuts.

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