The Laffer curve shows that as tax rates increase
A) initially tax revenues increase, then decrease.
B) tax revenues decrease as the incidence of cheating on tax returns increases.
C) tax revenues increase as more individuals and businesses have to pay taxes.
D) tax revenues remain unchanged.

Question

Quizplus · Accepted Answer

The Laffer curve suggests that as tax rates increase from low levels, tax revenue will increase. However, at some point, further tax rate increases will cause people to work less or to move their money abroad, which will cause tax revenues to fall. Therefore, there is a point at which the tax rate maximizing revenue is reached, beyond which further increases actually decrease revenue. This point is known as the optimal tax rate. Option A best reflects this principle.

The Laffer Curve Shows That as Tax Rates Increase