New Enroll here to Join NaBFID Analyst Into Class on May 6

    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.

    Practice Next