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In: Economics

Assume the government's goal is to maximize tax revenue. Also assume that the Laffer curve is calculated perfectly and accurately.


Assume the government's goal is to maximize tax revenue. Also assume that the Laffer curve is calculated perfectly and accurately. Assume that all of the effects of taxation are completely captured by the Laffer curve. 

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 If the government is at point B and the government wants to maximize tax revenue, what should it do to taxes? Increase, decrease, or leave them unchanged?

Solutions

Expert Solution

Government should increase the tax rate.

Graph shows the relationship between tax rate and total tax revenues. As the tax rate increases total tax revenue increases upto point C and after that tax revenue starts decreasing.

So if government is at point B it should increase the tax rate until it reaches point C where tax revenues are maximum.

Rahul Sunny answered 2 years ago
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