Which of the following might explain a decrease in national saving when the tax rate on savings is reduced?
A)its income effect on saving and its effect on the government budget
B)its income effect on saving but not its effect on the government budget
C)its effect on the government budget but not its income effect on saving
D)neither its income effect on saving nor its effect on the government budget

Question

Quizplus · Accepted Answer

A decrease in tax rate on savings would increase the disposable income of individuals, which would lead to higher consumption, and consequently, a decrease in saving. This is the income effect on saving. However, a reduction in tax revenue from savings would also have an impact on the government's budget. Thus, both the income effect on saving and the effect on the government budget would explain the decrease in national saving.

Which of the Following Might Explain a Decrease in National