39.) Economic growth over the past decade in the country Tarragon has been very

Question

39.) Economic growth over the past decade in the country Tarragon has been very low. As a result, the unemployment level has remained high. While discussing possible measures to improve the situation, Jane Watson, an associate at a leading research institute, says that the government should lower personal income tax rates. This, she believes, will induce people to work more, which in turn will raise output. Martina Allen, an editor of a reputed newspaper, disagrees. According to her, the income tax rates in Tarragon are not very high and are in fact similar to comparable countries. In her opinion, the government should lower the corporate tax rates to encourage investment by firms.

Which of the following, if true, will weaken the claim that it would be more effective to lower corporate taxes to increase aggregate supply than to reduce personal income tax rates?

A. Personal income tax rates have not been changed in the last five years.

B. The government's budget deficit is currently three percent of Tarragon's GDP

C. Some of the largest firms in the country reported a fall in profits last year.

D. The domestic firms' unplanned inventories have increased by more than 25 percent this year.

E. Corporate taxes generated more revenue for the government of Tarragon last year than personal income taxes.

Explanation / Answer

The correct choice is E

Explanation : - As Corporate taxes generated more revenue for the government of Tarragon last year than personal income taxes, lowering the corporate taxes can actually hinder the economic growth in Tarragon as the government will have comparatively lessser revenue when compared to previous years . Even though corporate investment will increases and more jobs may be created , the government spending will be less due to the decline in revenue . Thus the decline in tax revenue will weaken the claim that it would be more effective to lower corporate taxes .

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