Multiple choice

A temporary increase in marginal tax rate will:

  1. increase employment

  2. increase output

  3. raise the deficit

  4. lower output
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

A temporary increase in marginal tax rates reduces the incentive to work and invest because it lowers the after-tax return on labor and capital. According to supply-side economics and neoclassical theory, this leads to lower output in the short run. The effect is particularly relevant for the marginal tax rate which affects the decision to work additional hours.

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