<p style=”text-align:justify”><span style=”font-size:11pt”><span style=”line-height:normal”><span style=”font-family:Calibri,sans-serif”><span lang=”EN-IN” style=”font-size:12.0pt”><span style=”font-family:"Cambria","serif"”>The Laffer curve is a theory developed by supply-side economist Arthur Laffer to show the relationship between tax rates and the amount of tax revenue collected by governments. The curve is used to illustrate Laffer’s main premise that the more an activity — such as production — is taxed, the less of it is generated. Likewise, the less an activity is taxed, the more of it is generated. </span></span></span></span></span></p>
<p style=”text-align:center”><img alt=”” src=”https://i.filecdn.in/476edenias/freesnippingtool-com_capture_20201108111513-1604814431388.png” /></p>
<p style=”text-align:justify”><span style=”font-size:11pt”><span style=”line-height:normal”><span style=”font-family:Calibri,sans-serif”><span lang=”EN-IN” style=”font-size:12.0pt”><span style=”font-family:"Cambria","serif"”>The Laffer curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T* on the diagram below) would cause people not to work as hard or not at all, thereby reducing tax revenue. </span></span></span></span></span></p>
<p style=”text-align:justify”><span style=”font-size:11pt”><span style=”line-height:normal”><span style=”font-family:Calibri,sans-serif”><span lang=”EN-IN” style=”font-size:12.0pt”><span style=”font-family:"Cambria","serif"”>Eventually, if tax rates reached 100 per­cent, shown as the far right on his curve, all people would choose not to work because everything they earned would go to the government. Governments would like to be at point T* because it is the point at which the government collects maximum amount of tax revenue while people continue to work hard.</span></span></span></span></span></p>
<p style=”text-align:justify”><span style=”font-size:11pt”><span style=”line-height:normal”><span style=”font-family:Calibri,sans-serif”><span lang=”EN-IN” style=”font-size:12.0pt”><span style=”font-family:"Cambria","serif"”>There are some fundamental problems with the Laffer curve — notably that it is far too simplistic in its assump­tions. While the curve assumes that societies function on a single tax rate and a single supply of labor, that can’t be further from the truth. In reality, public finance structures are much more complex. The curve does not take into account how revenue is affected by multivalued tax rates. Simply, the fact that any increase in the tax rate to a certain percentage may not necessarily equate to the same revenue as a decrease in the tax rate. The curve also does not take into account any avoidance of taxes at any level.</span></span></span></span></span></p>
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