Suppose an the government has a current tax rate of c. Knowing the Laffer Curve is depicted below advise the president on whether the tax rate should be increased, decreased, or remain the same.
As an advisory to the president, you should recommend that the tax rate be reduced for two reasons. First, decreasing the tax rate will increase tax revenue. Tax revenue will increase up to the tax rate of b, at which point the tax revenue will begin to decline again. The other reason the tax rate should be reduce is that the same tax revenue would be generated at rate a with fewer distortions to the market. If the level of revenue to the government hopes to raise is its current level, the economy would be closer the efficient level at rate a.
You might also like to view...
A open market purchase of government securities by the Fed will cause which of the following?
A) an increase in the equilibrium quantity of reserves B) a reduction in the federal funds rate C) an increase in the amount of excess reserves that banks will wish to hold D) all of the above
When a consumer shifts purchases from product X to product Y, the marginal utility of:
A. X falls and the marginal utility of Y rises. B. X rises and the marginal utility of Y falls. C. both X and Y rises. D. both X and Y falls.