Answer to Question #307822 in Microeconomics for Himanshu

Question

Does tax revenue always increase with increase in tax rate? Why or why not. Explain.

Answer 1

The prominent American economist Arthur Laffer created a theory, the essence of which is the following effect: with an increase in the tax rate, the amount of tax revenues increases, but at some point a point will be reached, after which, with a further increase in the tax rate, the total amount of tax revenues to the budget will decrease.

With an increase in the tax rate, at some point, such a value will be reached, after which the producers will no longer have an incentive to increase their income, because a significant part of it will have to be paid to the state. Accordingly, after reaching this point, any increase in the tax rate will lead to a decrease in tax revenues.