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Georgia Dickens is sitting with a friend at a coffee shop, and they are talking about the new tax bill. Georgia thinks that cutting tax rates at this time would be wrong: “Lower tax rates,” she says, “will lead to a larger budget deficit, and the budget deficit is already plenty big.” Do lower tax rates mean a larger deficit? Why or why not?
Macroeconomics
Solutions
Macroeconomics
Georgia Dickens is sitting with a friend at a coffee shop, and they are talking about the new tax bill. Georgia thinks that cutting tax rates at this time would be wrong: “Lower tax rates,” she says, “will lead to a larger budget deficit, and the budget deficit is already plenty big.” Do lower tax rates mean a larger deficit? Why or why not?
Identify whether a lower tax rate increases the budget deficit.
Explanation of Solution
The changes in the budget deficit due to the changes in the tax rates are determined by the corresponding changes in the tax base. This concept is explained using an example. Suppose the tax rate is 10% and the tax base is $100, then obviously the tax revenue revue will be $10
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