Final answer:
Arthur Laffer's concept that income tax revenue can increase when tax rates decrease is based on the Laffer Curve, which describes how lower tax rates can stimulate economic activity, lead to higher overall taxable income, and potentially result in greater tax collection.
Step-by-step explanation:
Economist Arthur Laffer famously suggested that there can be scenarios where income tax revenue increases following a decrease in tax rates; this is due to what is known as the Laffer Curve. The Laffer Curve illustrates the relationship between tax rates and the amount of tax revenue collected by the government. At a certain point, increasing tax rates can actually lead to a decrease in revenue because it disincentivizes income-producing activities.
When tax rates drop, individuals and businesses are more likely to engage in productivity because they get to keep a larger share of their income, which could lead to higher economic growth.
This increase in economic activity can result in more taxable income and, consequently, the possibility of more tax revenue despite the lower rates. Simultaneously, lower tax rates can also reduce the incentive for tax evasion, thereby broadening the tax base and increasing revenue.
Factors such as decrease in taxes, rise in wealth, and rise in future expected income can all contribute to this effect, aligning with the notion that tax policy can influence economic behavior and overall fiscal health.
The complete question is: A decrease in a taxpayer's AGI could increase the amount of medical expenses that can be claimed. is: