economics medium Fill in the Blank

The 'Laffer Curve' illustrates the theoretical relationship between tax rates and total tax revenue, suggesting that beyond a certain optimal point, excessively high tax rates will actually ___ total revenue by discouraging work and encouraging evasion.

  1. NaBFID (or National Bank for Financing Infrastructure and Development)
  2. NPCI (or National Payments Corporation of India)
  3. decrease (or reduce / lower)
  4. Solow (or Solow-Swan)

Answer: decrease (or reduce / lower)

Arthur Laffer's curve starts at zero revenue (0% tax), rises to a peak (the revenue-maximizing rate), and then slopes back down to zero (at 100% tax, no one would work). It is a foundational concept in supply-side economics, arguing that if an economy is already on the downward-sloping side of the curve, cutting tax rates can paradoxically stimulate so much new economic activity that total government revenue actually increases.

Topic Public Finance - Taxation
Exam Relevance UPSC Prelims, SSC CGL
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