Question

The Laffer Curve shows 

• That tax revenues are maximized when the tax rate is maximized 

• That tax revenues are maximized when tax rates are minimized 

• That tax revenues are maximized somewhere in between maximum and minimum tax rates 

• All of the above

Answer 1

The Laffer curve shows the relationship between tax rates and tax revenues. When the government increases the tax rate, the tax revenue also increases until to a certain level of point. Beyond the point, if the tax rate is increased, the tax revenue starts to fall because higher tax rates discourage people from working. Hence, the cutting taxes could lead to higher tax revenues. Hence, the Laffer curve shows that: the tax revenues are maximised when the tax rate is maximised, the tax revenues are maximised when the tax rates are minimised, the tax revenues are maximized somewhere in between maximum and minimum tax rates. The answer option is all of the above.

Answer 2

ANSWER :

Option : 3rd 

Explanation :

Laffer curve shows relationship between tax rate and the revenue collected by the Government. This curve is inverted-U shaped.

When tax rate is 100%, revenue is zero since no one would produce anything to pay 100% tax.

When tax rate is zero, obviously government revenue is again zero.

So, the revenue is maximised between maximum and minimum tax rates.