Which of the following is true according to the Laffer curve? a. an increase in tax rates will always cause tax revenues to increase.

b. when marginal tax rates are high, an increase in tax rates is likely to cause tax revenues to increase.

c. when marginal taxes are low, an increase in tax rates will probably cause tax revenues to decline.

d. when marginal tax rates are high, a reduction in tax rates may increase tax revenue.

Question

Damien

Business

20 March, 12:33

Which of the following is true according to the Laffer curve? a. an increase in tax rates will always cause tax revenues to increase.

b. when marginal tax rates are high, an increase in tax rates is likely to cause tax revenues to increase.

c. when marginal taxes are low, an increase in tax rates will probably cause tax revenues to decline.

d. when marginal tax rates are high, a reduction in tax rates may increase tax revenue.

+5

Answers (2)

Know the Answer?

Gideon · Answer 1

When marginal tax rates are low, an increase in tax rates will probably cause tax revenues to decline (C)

Explanation:

The Laffer curve is an economic curve that represents the relationship between the tax rates and its corresponding effects on tax revenues. the Laffer curve shows that an increase in tax rates will lead to a decrease in tax revenue because increase in tax rates is a discouraging factor for businesses and individuals willing to work.

The marginal tax is the tax charged on an additional income made by an individual or business for doing an extra work. and if the marginal tax rate is low and the tax rates are high the tax revenues will decline because revenue realized from marginal work will be very low as well as revenue realized from charging higher tax rates on incomes.

Jovani Davila · Answer 2

d. when marginal tax rates are high, a reduction in tax rates may increase tax revenue.

Explanation:

The Laffer Curve theoretises that lower tax rates makes for a stronger economy.

It was developed by Arthur Laffer in 1979.

The theory explains how shifts in tax rates have an effect in government revenues in two distinct ways. One is instantaneous, which he describes as "arithmetic." Every dollar cut back in tax means there is one less dollar in government revenue.

The other effect is longer-term, which Laffer explains is the "economic" effect. It is the direct opposite of the first effect as reduced tax rates means more money for the taxpayers, who then spend it. It provides more trading activity to meet consumer demand. To this end, more workers are hired by companies, who then spend their additional income. This creates an economic boom for a larger tax base. It eventually replaces any revenue lost from the tax cut.