Figure 8-23. The figure represents the relationship between the size of a tax and the tax revenue raised by that tax.
-Refer to Figure 8-23. If the economy is at point B on the curve, then an increase in the tax rate will
A)increase the deadweight loss of the tax and increase tax revenue.
B)increase the deadweight loss of the tax and decrease tax revenue.
C)decrease the deadweight loss of the tax and increase tax revenue.
D)decrease the deadweight loss of the tax and decrease tax revenue.

Question

Figure 8-23. The figure represents the relationship between the size of a tax and the tax revenue raised by that tax. 
-Refer to Figure 8-23. If the economy is at point B on the curve, then an increase in the tax rate will
A)increase the deadweight loss of the tax and increase tax revenue. 
B)increase the deadweight loss of the tax and decrease tax revenue. 
C)decrease the deadweight loss of the tax and increase tax revenue. 
D)decrease the deadweight loss of the tax and decrease tax revenue.

Quizplus · Accepted Answer

Point B is on the downward sloping portion of the Laffer curve where a tax rate increase would result in a decrease in tax revenue. However, it would also increase the deadweight loss of the tax. Therefore, the correct answer is B, which reflects both outcomes of an increase in the tax rate at point B.