The Laffer curve
A) shows the relationship between sales taxes and income taxes in the United States.
B) indicates that tax revenues are greatest when marginal tax rates are greatest.
C) relates the size of the government debt to the level of national output.
D) shows an inverse relationship between tax revenues and government spending.
E) has been used to demonstrate that a decline in the marginal tax rate may cause a rise in total tax revenue.

Question

Quizplus · Accepted Answer

The Laffer curve demonstrates that there is an inverse relationship between tax revenues and tax rates, meaning that as tax rates increase beyond a certain level, tax revenues will begin to decline. In contrast, a decrease in tax rates may lead to increased economic activity, which in turn can result in higher tax revenue overall. This is the central idea behind the Laffer curve, which has been used to argue for lower marginal tax rates as a means of stimulating economic growth while still collecting sufficient tax revenue to fund government programs.

The Laffer Curve