Question

Problem 5 “Laffer Curve” (20 points)

(6 pts) What is Laffer Curve?

(8 pts) As Canada recovers from the economic challenges brought on by the COVID pandemic, the federal government will make choices that will cause tax rates to rise or fall. This will cause a change in Canada’s position on the Laffer Curve.

Explain what will happen to Canada’s position on the Laffer Curve for both the cases where the tax rates rise and when they fall.

(6 pts) What will happen if Canada’s Tax Rate grows higher than T*?

Answer 1

the relationship between amount tax evenue & the of Laffer curve shows tax size (o rate) which is collected by the It shows the relationship Tax size but the tax shrinks governments. with increase ist Tax Revenue larger that tas the get much increases, market revenue ১০ 10 fall. Tax Revenue DEL Maritax becal cause revenue 15 tax rate pravo tarrate i.e., DWL a tax rate 20 can that when Canada Increases revenue observe tax decreases ist this tax size buch as level. increases then then after reaching the optimal 25 when tax tax size then with tax size grows beyond t starts to fall market starts to shrink DWL. high because of higher