Economics Interview Question:

Is it true that government revenues are increased because of lower tax rates?

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It is true to a point. The Laffer curve shows that revenues increase as the tax rates rise (0 tax rate = 0 revenue) up to a point, but the increase slows as the rate rises higher and at some point total revenue begins to decline. If your incremental tax rate is 1% and you can work 4 hours to make $100, you will get to keep $99 and most people would be willing to do this. You would probably will to work the extra hours if you were taxed 5 or 10%. However, if you were subject to an incremental rate of 99%, you would not work that long knowing the government was only going to let you keep $1. The "magic number" seems to be somewhere around 15-20%. If the rates are above this, people are not motivated to increase their earnings. Big corporations react the same way.
Submitted by: Administrator