If a country faces a decrease in income tax revenue, it will spend less on welfare schemes. Reducing
tax rates slightly will lower the risk of tax avoidance. Therefore, to be able to support much-needed
welfare schemes, countries should lower income tax rates.
Which of the following is an assumption on which the above conclusion is based?
Answers
Answer:
As you know, if any element of the C + I + G + (Ex - Im) formula increases, then GDP?total demand?increases. If the ?G? portion?government spending at all levels?increases, then GDP increases. Similarly, if government spending decreases, then GDP decreases.
When it comes to financial management, four characteristics of the government set it apart from households and businesses (the ?C? and ?I? in the formula):
EconoTip
The interest rate on U.S. bonds is considered the risk-free interest rate because there is no credit risk associated with them. There is, however, the risk of inflation. Therefore, the rate on a government security represents the price to ?rent? that money for that period of time with the certainty that it will be paid back, plus any inflation premium.
EconoTalk
The tax base in a nation, region, state, or city is the number of workers and businesses who can be taxed. The term usually refers to income taxes, but in the case of states and cities, it also refers to sales and property taxes.
Bracket creep occurs when inflationary pressure increases wages and pushes a worker into a higher tax bracket. This puts a ?double whammy? on the worker, who loses purchasing power?wage-push inflation often increases prices faster than wages?and pays more in taxes. But it helps keep inflationary pressures under control.
Government has the power to tax, which gives it greater control over its revenue. Federal, state, and local governments can mandate higher taxes and increase their revenues. Households and businesses have the more difficult task of selling their labor, goods, and services in order to raise revenue.
By increasing or decreasing taxes, the government affects households' level of disposable income (after-tax income). A tax increase will decrease disposable income, because it takes money out of households. A tax decrease will increase disposable income, because it leaves households with more money. Disposable income is the main factor driving consumer demand, which accounts for two-thirds of total demand.
The federal government can finance budget deficits by borrowing in the financial markets. Investors consider U.S. government bonds to be risk free, because they are backed by the taxing power of the government. States and cities also issue bonds to finance deficits. These bonds, however, are considered riskier because the tax base of the state or city could erode.
The federal government?and only the federal government?can print more money. Like raising taxes, this has potential economic consequences (in the form of higher inflation) as well as political consequences. Nevertheless, the federal government does have that option, which is certainly not open to households and businesses.
These unique characteristics set the government apart from the other players in the economy. They also position the federal government to formulate and implement economic policy.
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