The graph that plots hypothetical tax revenues at various income tax rates is commonly called the _____ curve.
A) revenue-enhancement
B) Phillips
C) Laffer
D) tax efficiency

Question

Quizplus · Accepted Answer

The curve that plots hypothetical tax revenues at various income tax rates is commonly called the Laffer curve, named after economist Arthur Laffer. The Laffer curve illustrates the relationship between tax rates and tax revenue. At very low tax rates, revenue is low because there is not enough money being collected from taxpayers. At very high tax rates, revenue is also low because people will reduce their work effort and economic activity to avoid paying taxes. The curve shows that there is an optimal tax rate where revenue is maximized. Beyond this rate, increasing tax rates will actually decrease revenue as people work and invest less in response to higher taxes.

The Graph That Plots Hypothetical Tax Revenues at Various Income