The reduction of tax ?
Correct answer: C. could increase tax revenue if the tax had been extremely high
- A. will have no impact on tax revenue.
- B. will always reduce tax revenue regardless of the prior size of the tax
- C. could increase tax revenue if the tax had been extremely high
- D. causes a market to become less efficient
Explanation
Under the Laffer-curve idea, a very high tax rate can reduce the tax base and discourage economic activity, so lowering it may increase total revenue. This is not true for every initial tax rate.
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Government revenue and expenditure are analysed through taxation, public borrowing, budgets, subsidies, transfers and public debt. The topic explains how fiscal policy affects resource allocation, income distribution, economic stability and growth, while distinguishing direct from indirect taxes, progressive from regressive taxation, and public goods from goods supplied by private markets.
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