According to the Laffer Curve, which approach is most effective for increasing government revenue by decreasing taxes?

• A. Eliminating all taxes to maximize economic activity
• B. Reducing tax rates that are currently above the revenue-maximizing point
• C. Reducing tax rates that are already below the revenue-maximizing point
• D. Increasing tax rates across all income levels

Answer: (B)

Verified step by step guidance

1. Understand the Laffer Curve concept: it illustrates the relationship between tax rates and government revenue, showing that revenue first increases with tax rates but eventually decreases if tax rates become too high due to reduced economic activity.
2. Identify the revenue-maximizing tax rate on the curve, which is the point where government revenue is at its highest before further increases in tax rates cause revenue to fall.
3. Analyze the effect of reducing tax rates above the revenue-maximizing point: lowering these high tax rates can stimulate economic activity, which may increase overall tax revenue despite the lower rate.
4. Consider the effect of reducing tax rates below the revenue-maximizing point: since these rates are already low, further reductions typically decrease government revenue because the increase in economic activity is not enough to offset the lower rates.
5. Conclude that the most effective approach to increase government revenue by decreasing taxes is to reduce tax rates that are currently above the revenue-maximizing point, as this moves the economy toward the optimal balance between tax rates and economic activity.