Final answer:
While reducing taxable income generally reduces the tax liability, it does not always correspond to a dollar-for-dollar reduction due to various tax rules, credits, and exceptions.
Also, the Laffer Curve illustrates that lower tax rates can potentially lead to increased tax revenue by expanding the economic base.
Step-by-step explanation:
Reducing taxable income for Adjusted Gross Income (AGI) does not always occur dollar for dollar due to the presence of exceptions and specific taxation rules. In the USA, the formula for calculating taxable income is fundamentally taxable income = adjusted gross income - (deductions and exemptions).
However, certain personal circumstances and tax credits can influence this calculation, leading to situations where reducing AGI might affect taxation in a non-linear manner. For example, the presence of tax credits and the alternative minimum tax can modify the amount of tax payable, even if AGI is lowered by the same amount.
Moreover, the observation by economist Arthur Laffer that in some situations, income tax revenue can increase when tax rates decrease, known as the Laffer Curve, alludes to the complex relationship between taxable income, tax rates, and actual tax revenue. This phenomenon can happen when lower tax rates stimulate economic activity to such an extent that the broader tax base compensates for the lower individual tax rates.