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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?

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Macroeconomics

13th Edition
Roger A. Arnold
Publisher: Cengage Learning
ISBN: 9781337617390

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BuyFindarrow_forward

Macroeconomics

13th Edition
Roger A. Arnold
Publisher: Cengage Learning
ISBN: 9781337617390
Chapter 11, Problem 24QP
Textbook Problem
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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?

To determine

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(100×10/100). If the tax rate increases from 10% to 12% and the tax base decreases from $100 to $90, then the tax revenue will be $10

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Chapter 11 Solutions

Macroeconomics
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