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    Question

    Which of the following statement is correct

    Statement 1: Laffer Curve shows relationship between tax rates and the amount of tax revenue collected by government Statement 2: At a 0% tax rate, collected tax revenue will be zero Statement 3: At a 100% tax rate, collected tax revenue will be maximum
    A Only Statement 1 Correct Answer Incorrect Answer
    B Only Statement 2 Correct Answer Incorrect Answer
    C Only statement 3 Correct Answer Incorrect Answer
    D Only Statement 1 and statement 2 Correct Answer Incorrect Answer

    Solution

    Laffer Curve shows relationship between tax rates and the amount of tax revenue collected by government It suggests that raising the tax rate upto a certain limit will increase the tax revenue, after which any rise in the tax rate will decrease the tax revenue A high tax rate will discourage the taxed activities, such as work and investment Laffer curve shows the two extreme point of tax rate, 0% and 100%, at both of these rate no tax revenue will be generated At a 0% tax rate, tax revenue will be zero. As no tax impose, no revenue At 100 % tax rate, all people would choose not to work because everything they earned would go to the government. Therefore, is a point lying in between 0 to 100% range, where tax revenue is maximum (Rmax) (say t%) i.e. known as optimum tax rate Any rate higher or lower than that will lower the tax revenue If government wants to increase tax revenue, it will choose optimum tax rate.

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