Question

Which of the following statements about taxation is TRUE?

A. There is a tax rate at which tax revenues are maximized.
B. Dynamic tax analysis assumes that an increase in taxation will leave the tax base unchanged.
C. Increasing taxes will always increase tax revenues.
D. Static tax analysis recognizes that an increase in taxation could lead to a decrease in tax revenues.

Answer 1

Answer:

A. There is a tax rate at which tax revenues are maximized.

Explanation:

By Laffer Curve definition we can easily understand the relationship between tax rate and tax revenues. It was developed by Arthur Laffer. The Laffer Curve describes that:

• with an optimal tax rate government maximizes total  tax revenues

• there is no tax revenue collection at the two extreme tax rates of 0% and 100%
• at the left side of the curve higher tax rates decrease the incentive to work and invest. As a result this leads to to decrease in total tax revenue.