The government reduces the corporate profits tax. As a result, corporate profits increase. This will ________ the nonlabor income of households, causing consumption to ________ and labor supply to ________.

Question

Quizplus · Accepted Answer

When the corporate profits tax is reduced, corporate profits increase, which means the income of corporations increases. This increase in income increases the nonlabor income of households, which leads to an increase in consumption. However, the decrease in the tax rate on corporate profits may also encourage corporations to invest in labor-saving technology, which may reduce labor demand and cause a decrease in labor supply. Therefore, the correct answer is C as it accounts for the positive effect on consumption and the potential negative effect on labor supply.

The Government Reduces the Corporate Profits Tax