A Laffer curve shows the relationship between tax rates and tax revenue. As tax rates increase, tax revenue increases initially, but at some point, further tax rate increases lead to a decrease in tax revenue due to the disincentive effect on work and investment. Therefore, tax revenues reach a maximum at some tax rate below 100%. This is the main premise of the Laffer curve.

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A Laffer Curve

Question 86

Multiple Choice

A Laffer curve

A) relates the marginal tax rate to the average tax rate.
B) shows that tax revenues reach a maximum when the marginal tax rate is zero.
C) relates the government's sales- tax yield to the marginal tax rate.
D) relates the government's total income- tax revenue to the average rate across all taxes.
E) shows that,for any tax,tax revenues reach a maximum at some tax rate below 100%.

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