What is the Laffer Curve? Explain the relationship that is shown in the curve.
What will be an ideal response?
The Laffer Curve indicates that the relationship between tax rates and tax revenues is not a clear one. At the extreme, both a zero rate and 100% tax rate will produce zero revenue. In between the two extremes there is an optimal tax rate in terms of maximizing revenue. If tax rates are above the optimal level, then tax revenues will rise as tax rates are cut. If tax rates are below the optimal level then tax revenues will fall as tax rates are cut. Laffer argued that tax rates were above the optimal level and that by lowering tax rates, the government could increase tax revenue and increase economic output at the same time.
You might also like to view...
The corporate income tax is ultimately paid by all of the following except
A) owners of the corporation. B) the corporation's debtors in the form of lower rates of return on the corporation's bonds. C) employees in the form of lower wages. D) customers in the form of higher prices.
If the price of a hamburgers increases, the substitution effect works to
a. decrease the quantity of hamburgers supplied b. increase the number of hamburger buns demanded c. decrease the quantity of hamburgers demanded d. increase the number of hamburger buns supplied e. increase the quantity of hamburgers demanded