A reduction in the tax rate on income from saving would
A)most directly benefit the poor in the short run.
B)increase real wages over time.
C)decrease the capital stock over time.
D)decrease productivity over time.

Question

Quizplus · Accepted Answer

A reduction in the tax rate on income from saving would encourage more people to save, which would increase the supply of loanable funds available for investment. This increase in investment would lead to an increase in capital accumulation (i.e. the capital stock) over time. This increase in the capital stock would lead to an increase in productivity and ultimately to an increase in real wages over time. Therefore, choice (B) is the best answer as it accurately describes the long-term benefits of a reduction in the tax rate on income from saving.

A Reduction in the Tax Rate on Income from Saving