Question

an income tax cut in a large open economy with a trade surplus decrrase capital outflows.

true or false

Answer 1

From my view point it's True. Before explainting this context we would like to know the details of What is actually means about Capital outflows.

Capital Outflows means amount of money that leave's a country's economy and is then kept for invested in other countries during a particular period of time. Main reason behind the practice of Capital outflow are given below:

A) Investment Climate : It is very much necessary for the country to provide the best investing climate in their economy. For providing the ideal investment climate to the country means to each and every aspect like healthy political, financial and economic conditions in the country. Suppose slow down in the economy means investor can lost the confidence in that economy that leads to get out of from this and invest the amount to some other coutry who have provide better economic security to them.

B) Discrimination betweeen native and foreing capital: For providing some subsidies and other form to attaract the foreign investment will leads to the discrimnation of native peoples with the foreign investors. This will leads to lost in faith to the economy for the native and they are looking opt for other options for the investment.  

C) Wealth and Integration : It is very necessary for the countries to provide an equal importants in both wealth and Integration. For arising this country should emphasises increase in the GDP will leads to belief in the investors to invest the money into their own contries with integration.

To reduce the burden of capital outflow from country like large open economy should provde helping packages to attract the native investors for their investment in the same country. One of best measures for this is to reduce the income tax rates which will give extra boost to them to raise their confidence in their money investment in the economy and that will help to increase the trade surpus with improvement in GDP growth also. Apart from this government should take more relief measures benefited to native investors that will also help to belief in the economy.