ECONOMICS (CBSE/UGC NET)

ECONOMICS

FISCAL POLICY

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
The theory of the Laffer curve was used to argue for ____
A
increasing government revenue
B
cutting income tax rates
C
raising income tax rates
D
decreasing aggregate demand
Explanation: 

Detailed explanation-1: -Laffer curve was developed by the economist, Arthur Laffer. The theory analyses the relationship between tax rates and the tax revenue collected by the government. The theory relies on the argument that cutting tax rates increases the total tax revenue for a government.

Detailed explanation-2: -The Laffer Curve displays the relationship between tax rates and tax revenue collected by governments and is often used to illustrate the argument that cutting tax rates can result in increased total tax revenue.

Detailed explanation-3: -Detailed Solution. The correct answer is tax rate and tax revenue. Laffer curve explains the relationship between tax rate and tax revenue. At lower as well as higher rate of tax, the tax revenue low.

Detailed explanation-4: -The curve assumes a parabolic shape. It suggests that at the initial point, the origin when the tax rate is 0%, there is no revenue for the government. As the government increases the tax rate, the revenue also increases until T*. Beyond point T*, if the tax rate is increased, revenue starts to fall.

Detailed explanation-5: -Some of the criticisms of the Laffer curve are, it makes very simplistic assumptions, revenue may well be a multivalued function of tax rate which is not considered in the Laffer curve. It does not take into account tax avoidance. These are some of the criticisms of the Laffer curve.

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