A tax on productive activity tends to
A)increase formal market activity because it decreases prices
B)decrease formal market activity because it increases work incentives
C)decrease formal market activity because it lowers the return on such activity
D)decrease activity in the underground economy because people are afraid of being connected with tax fraud
E)increase activity in the underground economy because people are afraid of being connected with tax fraud

Question

Quizplus · Accepted Answer

A tax on productive activity lowers the return on such activity, making it less profitable for individuals or companies to continue with the same level of productive activity. This leads to a decrease in formal market activity. Additionally, if the tax is too high, individuals or companies may choose to engage in the underground economy in order to avoid paying taxes, which could further decrease formal market activity. Therefore, option C is the best choice.

A Tax on Productive Activity Tends to