Why does a reduction in taxes have smaller multiplier effect

Reference no: EM131926626

Question: 1. Why does a reduction in taxes have a smaller multiplier effect than an increase in government spending of an equal amount?

2. Suppose Congress enacts a tax reform law and the average federal tax rate drops from 30 percent to 20 percent. Researchers investigate the impact of the tax cut and find that the income subject to the tax increases from $600 billion to $800 billion. The theoretical explanation is that workers have increased their work effort in response to the incentive of lower taxes. Is this a movement along the downward-sloping or the upward-sloping portion of the Laffer curve?

Reference no: EM131926626

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