It Has Been Argued That, "A Tax Cut Must Be

question 44

Multiple Choice

It has been argued that, "A tax cut must be followed later by a tax increase to pay for the resulting deficit" is the self-fulfilling prophecy of those who use it to predict that an income windfall from a tax reduction must be temporary. The argument can be supported by

• A) appealing to forward-looking consumption theory, which predicts that a temporary increase in income produces only a small increase in consumption.
• B) noting that small consumption increases produce very little economic stimulus.
• C) recalling that larger than expected gaps between actual and potential GDP mean larger deficits spawned by enlarged transfer programs and reduced tax revenues.
• D) all of the above.
• E) none of the above.

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