Based on the Laffer Curve, a cut in the tax rate from 100 percent to a point before the maximum level of tax revenue will:
A)decrease real GDP.
B)increase tax revenues.
C)decrease tax revenues.
D)have no effect on tax revenues.

Question

Quizplus · Accepted Answer

According to the Laffer Curve, at some point, increasing tax rates will actually decrease tax revenue because it will discourage economic activity and discourage people from earning or reporting income. Therefore, cutting taxes from a 100 percent tax rate to a point before the maximum level of tax revenue will increase the incentive for people to work and earn income, resulting in an increase in overall tax revenue. This is known as the "tax cut effect".

Based on the Laffer Curve, a Cut in the Tax