Question

In 1975 President Gerald Ford decreased federal income tax rates to stimulate the American economy. There was little change in households' consumption; in fact, consumers' savings increased.

In 1981 President Ronald Reagan decreased federal income tax rates. The result was a substantial increase in consumer spending, while consumers' saving remained steady.

Why did these tax cuts have such different results?

Answer 1

This may be the reason for the MPC that is present in the Consumption function . Consumption function is consist of autonomous consumption + Consumption depends on income .

C = C + cY_d , where Y_d is a dispossable income

Futher Y_d = Y - T , where Y is income and T is Taxes ,

So C = C + c( Y - T) .

So when In 1975 President Gerald Ford decreased federal income tax rates to stimulate the American economy then there was little change in households' consumption because at that time may the MPC is lower , so fall in taxes doesn't have a major impact on Consumption because of lower marginal propensity to consume ( MPC) of consumers . so instead of rising consumption , there was higher savings at that time .

So when In 1981 President Ronald Reagan decreased federal income tax rates. The result was a substantial increase in consumer spending due to higher MPC . Savings remain steady because all the income increase was basically goes in a consumption way instead of saving . So due to higher MPC at that time , consumption was higher .