When a tax on a good start small and is gradually increased tax revenue ?
Correct answer: C. will first rise and then fall
- A. will fall
- B. will rise
- C. will first rise and then fall
- D. will first fall and then rise
Explanation
A small tax initially raises revenue, but progressively higher taxes eventually shrink the tax base as buying, selling, or production is discouraged. Hence revenue first rises and then falls, as illustrated by the Laffer curve.
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About Public Finance
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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