2.6.2 Evaluating Fiscal Policy

Question 1

what can the Laffer Curve be used to support

Answer 1

tax cuts

Question 2

which economic perspective likes the Laffer Curve

Answer 2

free-market economists

Question 3

what is the Laffer Curve

Answer 3

it examines the relationship between economic activity and the rate of tax. it suggests there might be an optimum tax rate which maximises total tax revenue

Question 4

what are the axes on the Laffer Curve

Answer 4

• y axis: tax revenue
• x axis: tax rate (%)

Question 5

what is the first stage of the Laffer Curve

Answer 5

initially, as tax rater rises, the government will collect more tax revenue in total

Question 6

eventually what happens on the Laffer Curve

Answer 6

tax revenue reaches a maximum (T), then higher tax rates result in lower tax revenue due to disincentives

Question 7

why might total tax revenue fall if the tax rate increases

Answer 7

• increased tax avoidance
• stronger incentive to evade tax
• possible disincentives in the labour market
• possible “brain drain” effects

Question 8

is tax avoidance legal

Answer 8

yes

Question 9

what is tax evasion

Answer 9

illegal, non-declaration of income and wealth by people and businesses

Question 10

what do possible disincentives in the labour market depend on

Answer 10

which taxes have increased

Question 11

what is a brain drain

Answer 11

loss of highly skilled and high-income taxpayers who might leave the country