The graph above describes the notion that as tax rates rise from zero percent, tax revenues will:
A) Increase at first, but then decline eventually as tax rate continues rising
B) Decrease at first, but then increase eventually as tax rate continues rising
C) Rise higher and higher
D) Fall lower and lower until it shrinks to zero

Question

The graph above describes the notion that as tax rates rise from zero percent, tax revenues will:
A) Increase at first, but then decline eventually as tax rate continues rising 
B) Decrease at first, but then increase eventually as tax rate continues rising 
C) Rise higher and higher 
D) Fall lower and lower until it shrinks to zero

Quizplus · Accepted Answer

This graph illustrates the Laffer Curve, which suggests that there is an optimal tax rate that maximizes government revenue. As tax rates increase from zero, tax revenue initially increases due to the higher tax base. However, if tax rates continue to rise, eventually taxpayers will be discouraged from working or investing, leading to a decrease in taxable income and ultimately a decline in tax revenue.

The Graph Above Describes the Notion That as Tax Rates