Suppose that income tax revenues are maximized at an average (income)tax rate of 45 percent.If the Laffer curve is a correct diagrammatic representation of the relationship between tax rates and tax revenue,it follows that a tax rate of
A) 35 percent will reduce tax revenues.
B) 48 percent will reduce tax revenues.
C) 48 percent will generate as much tax revenue as a tax rate of 45 percent.
D) 35 percent will generate as much tax revenue as a tax rate of 45 percent.
E) a and b

Question

Quizplus · Accepted Answer

The Laffer curve illustrates that there is an optimal tax rate that maximizes revenue. If the tax rate is set higher than this optimal rate, tax revenues will decrease due to disincentives to work or invest. Therefore, both a tax rate of 35 percent (which is below the revenue-maximizing rate of 45 percent) and a tax rate of 48 percent (which is above the revenue-maximizing rate) will reduce tax revenues compared to the optimal rate of 45 percent.

Suppose That Income Tax Revenues Are Maximized at an Average