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25 February, 13:39

According to the theory of supply-side economics, a cut in the tax rate will actually result in an increase rather than a decrease in tax revenues. Which statement best explains how this is supposed to happen?

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  1. 25 February, 13:47
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    When the government lowers tax rates, both consumer spending and private investment increase, leading to an increase in economic growth which will in turn contribute to increase government revenue through a higher tax base.

    Explanation:

    For every dollar that an individual earns, two things happen:

    propensity to consume: proportion of total income that individuals decide to spend instead of saving. Consumer spending increases private consumption. propensity to save: proportion of total income that individuals decide to save instead of spending. All the money individuals save become private investment.
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