Question

A permanent decrease in taxes leads to:

A.a small decrease in current consumption.

B.a large increase in current consumption.

C.a large decrease in future consumption.

D.a small increase in current consumption.

E.no changes to consumption.

Answer 1

Decrease in taxes boosts the disposable income and induces person to consume more.

However, the nature of tax cut also dictates the increase in consumption especially the current consumption.

If the tax cut is temporary then people increase their consumption in small quantity as they like to save more so as to be able to pay higher taxes when temporary tax cut will be over.

On the other hand, if the tax cut is permanent then people increase their consumption in significant manner as there is no fear pf paying higher taxes in future.

So,

A permanent decrease in taxes leads to a large increase in current consumption.

Hence, the correct answer is the option (B).