Question

Refer to the table below, which lists the U.S. federal income tax rates for the different income brackets. If the highest point on the Laffer curve corresponds to a tax rate of 30%, then which of the following statements must be false?

Taxable income brackets	Tax rate
1	10%
2	15%
3	25%
4	28%
5	33%
6	35%

A) Increasing tax rates across all income tax brackets will cause a greater impact on tax revenue per return for the first income bracket than the third bracket.

B) Decreasing tax rates across all income tax brackets will not necessarily lead to higher tax revenue per return for all income brackets.

C) Increasing tax rates for the first and second income brackets will lead to lower tax revenue from those income brackets.

D) Increasing tax rates across all income tax brackets will cause a greater negative impact on tax revenue per return for the fifth income bracket than the sixth bracket.

Answer 1

Option C is answer!!.

Option A. Not the answer, as this is true when income tax rate is increased it will lead to increased tax collection per return for tax rates less than laffer curve tax maximum point (30%). Also due to decreasing slope of the curve increasing tax rates will have maximum impact on the less tax brackets than the higher tax brackets. Therefore in this case first income tax bracket will have higher tax impact than third tax bracket due to tax increase.

Option B. This option is not answer as it is true that decreasing tax rates will not lead to higher tax revenue per return for all income tax brackets. It will have higher tax revenue till bracket 4 but for bracket 5 & 6 it will lead to lower tax revenue per return.

Option C. This option is answer as this option must be false. Increasing income tax rate for 1st and 2nd brackets will lead to higher tax per return for those brackets due to these points fall below the highest point on laffer curve.

Option D. This option may or may not be false. As slope of laffer curve tends to increase for points above the highest point on laffer curve. Thus increasing tax rates will lead to lower tax collection per return for lower tax rates than higher tax rates. However slope of the curve may be flat in the beginning which may lead to same effect of increasing tax rates on 5th and 6th bracket. Therefore this statement is not definitely false.

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