The Laffer curve illustrates the principle that
A) when tax rates are quite high, reducing tax rates will increase tax revenue.
B) when tax rates are quite low, reducing tax rates will increase tax revenue.
C) when tax rates are quite high, reducing tax rates will decrease tax revenue.
D) increasing tax rates always increases tax revenue.

Question

Quizplus · Accepted Answer

The Laffer curve shows that as tax rates increase beyond a certain point, the disincentive effect on work and investment causes a decrease in tax revenue. In other words, there is an optimal point where tax revenue is maximized, and beyond that point, reducing tax rates can actually increase revenue. This principle applies when tax rates are high, so option A is the correct choice. Options B, C, and D are incorrect because they do not accurately describe the principle of the Laffer curve.

The Laffer Curve Illustrates the Principle That