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Laffer Curve

Posted on : 11 Feb 2020

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  • Laffer curve:In economics, the Laffer curve illustrates a theoretical relationship between rates of taxation and the resulting levels of government revenue.
  • The laffer curve suggest that as government increases tax rates, tax revenue also increases. But after a point, the tax revenue falls, because at very high rates of taxation people lose their motivation to work (tax evasion instances also increase). Hence, after a point, lowering tax rates can boost government revenue.
  • The LafferCurve also states that lower tax rates boost economic growth. It underpins supply-side economicsReaganomics, and the Tea Party’s economic policies. Economist Arthur Laffer developed it in 1979.
  • This effect is more long term, which Laffer describes as the "economic" effect. It works in the opposite direction.
  • Lower tax rates put money into the hands of taxpayers, who then spend it.
  • It creates more business activity to meet consumer demand.
  • For this, companies hire more workers, who then spend their additional income.
  • This boost to economic growth generates a larger tax base.
  • It eventually replaces any revenue lost from the tax cut.

Article Related Questions

  1. After the recent corporate tax cuts in an attempt to boost economic activity, there is an increased speculation for cuts in personal income taxes too. In this context, how will India’s economic slowdown reserve with results suggested by the ‘Laffer Curve’?
    1.A lower tax rate will reduce government revenue.
    2.A lower tax rate will increase disposable income.
    3.Business activity will increase to meet consumer demand, causing demand for workers to increase, who will spend their additional income.
    Choose the correct answer:

  2. 1.1 only

    2.1 and 2 only

    3.2 and 3 only

    4.3 only

    Right Ans : 2 and 3 only

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