Which of the following statements regarding the Laffer Curve is the most plausible?

• A. Government tax revenue always increases as the tax rate increases, regardless of the rate.
• B. There is a tax rate at which government tax revenue is maximized, and increasing the tax rate beyond this point will decrease total revenue.
• C. The Laffer Curve shows the relationship between government spending and economic growth.
• D. The Laffer Curve suggests that reducing tax rates will always decrease government revenue.

Answer: (B)

Verified step by step guidance

1. Understand the concept of the Laffer Curve: it illustrates the relationship between tax rates and total tax revenue collected by the government.
2. Recognize that at a 0% tax rate, government revenue is zero because no taxes are collected, and at a 100% tax rate, revenue is also zero because there is no incentive to earn taxable income.
3. Identify that the Laffer Curve suggests there is an intermediate tax rate between 0% and 100% where government revenue is maximized.
4. Analyze the implication that increasing the tax rate beyond this optimal point will reduce total tax revenue due to decreased economic activity or tax avoidance.
5. Conclude that the most plausible statement is the one acknowledging the existence of a tax rate that maximizes revenue, and that raising taxes beyond this point decreases revenue.