What does the Laffer Curve illustrate about tax revenue?

The Laffer Curve illustrates the relationship between tax rates and tax revenue, showing that tax revenue initially increases with increasing tax rates, but there is a point beyond which higher tax rates lead to a decrease in total revenue.

The correct choice states that tax revenue at 0% and 100% tax rates is the same. At a 0% tax rate, no taxes are collected, and at a 100% tax rate, no one has the incentive to earn income since all earnings would be taken away, leading to no economic activities that generate taxable income. Therefore, in both cases, the government collects zero revenue, which the Laffer Curve fundamentally underscores.

The understanding of the Laffer Curve is essential for policymakers who need to strike a balance between an effective tax rate that maximizes revenue without discouraging productivity and economic activity. This nuanced view is crucial for informed discussions on tax policy and its impact on the economy.