If tax rates are cut,one might expect to observe an increase in the budget deficit.Supply-siders question this observation,arguing that

A) this is a price that must be paid for a more equitable tax system.
B) when taxes are cut,expenditures must also be cut.
C) a decrease in the tax rate may actually generate an increase in tax revenues.
D) tax wedges will make up the difference.
E) taxes should not be cut;transfer payments should be increased.

Question

Allison Niese · Accepted Answer

Final Answer : C, Explanation :  Supply-siders believe that a decrease in tax rates can actually lead to an increase in tax revenues because it can stimulate economic growth and encourage investment. This theory is based on the idea that lower tax rates will provide individuals and businesses with greater incentives to work, save, and invest, which will ultimately lead to higher levels of economic activity and a broader tax base. As a result, they argue that cutting taxes will not necessarily increase the budget deficit, but in fact, may generate more revenue for the government.

Definitions

Learning Objectives

Learning Objectives

Related questions