Which of the following scenarios is consistent with the Laffer Curve?

• A. Increasing the tax rate from 40% to 50% leads to a decrease in total tax revenue.
• B. Total tax revenue remains unchanged as tax rates increase.
• C. Lowering the tax rate always decreases total tax revenue.
• D. Raising the tax rate always increases total tax revenue, regardless of the initial rate.

Answer: (A)

Verified step by step guidance

1. Understand the Laffer Curve concept: It illustrates the relationship between tax rates and total tax revenue, showing that revenue first increases with higher tax rates but eventually decreases after a certain point because high taxes discourage work or investment.
2. Identify the key implication of the Laffer Curve: There exists a tax rate beyond which increasing the tax rate actually reduces total tax revenue due to decreased economic activity.
3. Analyze the given scenarios in light of the Laffer Curve: The scenario where increasing the tax rate from 40% to 50% leads to a decrease in total tax revenue aligns with the idea that the tax rate is beyond the revenue-maximizing point on the curve.
4. Contrast other options: Total tax revenue remaining unchanged or always increasing/decreasing with tax rate changes contradicts the Laffer Curve's non-linear relationship between tax rates and revenue.
5. Conclude that the scenario where raising the tax rate from 40% to 50% decreases total tax revenue is consistent with the Laffer Curve, as it reflects the diminishing returns of higher tax rates on revenue.