The graph describes the notion that as tax rates rise from zero percent, tax revenues will
A) increase at ﬁrst, but then decline eventually as tax rates continue rising.
B) decrease at ﬁrst, but then increase eventually as tax rates continue rising.
C) rise higher and higher.
D) fall lower and lower until they shrink to zero.

Question

The graph describes the notion that as tax rates rise from zero percent, tax revenues will
A) increase at ﬁrst, but then decline eventually as tax rates continue rising. 
B) decrease at ﬁrst, but then increase eventually as tax rates continue rising. 
C) rise higher and higher. 
D) fall lower and lower until they shrink to zero.

Quizplus · Accepted Answer

The Laffer Curve asserts that at a zero tax rate, the government collects zero revenue, and at a 100% tax rate, the government also collects zero revenue because there would be no incentive for individuals or businesses to earn income. As tax rates rise from zero percent, tax revenues increase at first, but then decline eventually as tax rates continue rising. This occurs because higher tax rates provide individuals and businesses with less incentive to work, invest, and take risks, ultimately leading to lower economic output and a smaller tax base.

The Graph Describes the Notion That as Tax Rates Rise