What describes the relationship between income tax rates and total tax revenue?

The relationship between income tax rates and total tax revenue is best described by the Laffer curve. This economic theory illustrates the concept that increasing tax rates can initially lead to higher tax revenues, but beyond a certain point, further increases in tax rates may actually result in a decrease in total tax revenue. This happens because excessively high tax rates can discourage work, investment, and consumption, ultimately leading to a shrinking tax base.

The Laffer curve emphasizes that there is an optimal tax rate that maximizes revenue without diminishing economic activity. When tax rates are low, increasing the rates can boost revenues as individuals and businesses are encouraged to earn and report more income. However, as rates rise, the disincentives can outweigh the benefits, leading to less economic activity, tax avoidance, or evasion.

The other concepts mentioned do not relate to the direct relationship between income tax rates and total tax revenue. The Lorenz curve is used to represent income inequality, the Gini coefficient quantifies income distribution inequality, and absolute advantage relates to the efficiency of producing goods and services in international trade. Thus, the Laffer curve specifically captures the nuanced dynamic between tax rates and revenue generation.