Question

Q. Which of the following statements is/are correct in the context of the “Laffer curve”?

Select the correct answer using the code given below:

• A.
  1 only
• B.
  2 only
• C.
  Both 1 and 2
• D.
  Neither 1 nor 2

Answer 1

The correct option is D

Neither 1 nor 2
Explanation:

Statement 1 is incorrect: The Laffer curve draws a relationship between the behaviour of the taxpayers to pay and the tax rate imposed by the government. It says that the tax will be paid upto an optimal point after that it starts reducing as the tax rate increases. This is because people get disincentivized due to the rising tax rates and do not work and invest

Statement 2 is incorrect: One of the disadvantages of the above theory is that the government can not expect the actual shape of the curve and thus the optimal point at which tax revenue will be maximum can not be pointed. This is because the behaviour of the taxpayers will depend upon multiple factors in real life and is not limited to only the tax rate.