Test-taking 101
Just took my first final, for Honors Economics. On it was the following question:
Draw a Laffer curve for the relationship between tax rate and actual tax revenue. EXPLAIN why it looks that way.
I skipped class for couple weeks once, and at least once a week throughout the term. I had no idea what a Liffer curve was. Here is what I gathered from the question itself:
- tax rate (probably along the x-axis)
- tax revenue (along the y-axis)
- it is a notable curve (why might it be notable?)
This is less information than is usually on questions that I don't know, but I can go at it anyway. Luckily economics is a somewhat intuitive field.
My answer: There is a certain point at which a higher tax will discourage people from working to get into a higher tax bracket. The reward is not worth the extra effort. After that point, people will work less, meaning that the actual pie from which the government takes its cut is smaller, resulting in less total revenue.
And the Wikipedia entry on the Laffer curve. Completely right, with no prior knowledge.