A Laffer curve shows that as tax rates increase, eventually there will be a point where tax revenues will start to decrease as people have less incentive to work and invest due to the high tax burden. Therefore, there is a peak point where tax revenues are maximized before it starts to decline again. This peak point is below a 100% tax rate because if taxes were 100%, then there would be no incentive to work at all.

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A Laffer Curve

Question 35

Multiple Choice

A Laffer curve

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

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