One of the effects of reducing tax rates would be an increas

One of the effects of reducing tax rates would be an increase in the after-tax incomes of those with relatively high earnings. What sort of \"ripple effects” would this have? Could it even change some people\'s majors in school? Why?

Solution

reduction in income tax rates affect the behaviour of individuals and businesses through both income and substitution effects. The positive efects of tax rates cuts on the size of economy arise because lower tax rate raise the after tax- reward to working, saving and investing. These higher after tax rewards induce more work effort, saving and investment through substitution effects. Another positive effect of pure rate cuts is they reduce the value of existing tax distortions and induce an efficiency improving shift in the composition of economic activity away from currently tax favoured sectors such as health and housing. But pure rate cuts may also provide positive income effects, which reduce the need to work, save and invest.