According to supply-side theory, a cut in taxes will tend to cause ________. an increase in...

According to supply-side theory, a cut in taxes will tend to cause ________.

an increase in the amount of total tax revenue collected

a decline in the amount of total tax revenue collected

individual workers to devote more time to leisure activities

no change in the amount of total tax revenue collected

Solutions

Expert Solution

Supply side economists describe that the changes in marginal tax rate influence the level of economic activity. They believe that high marginal tax rates reduce income, output and the efficiency in the use of resources. An increase in tax rate reduces incentive to work and it also encourages tax sheltering investment and other form of tax avoidance. This will reduce the tax revenue of the government. But a decrease in marginal tax rate encourages incentive to work and divert resources from tax motivated investment to productive investment. According to Arthur Laffer an increase in tax rate leads to a less than proportional increase in tax revenue. Thus the tax revenue will decrease. But a lower marginal tax rate leads to a more than proportionate increase in tax revue by encouraging incentive to work and productive investment.

An increase in the amount of total tax revenue collected.

Rahul Sunny answered 2 years ago

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