A report on the EU economic stimulus plan suggested that ʺ... Governments must consider ... cutting VAT [value added tax] and labor taxes ...ʺ The VAT is similar to a sales tax. If governments follow the suggestions, there will be ____________according to the supply-side view.
A) an increase in labor supply and a decrease in the tax wedge
B) an upward shift in the aggregate production function
C) an increase in saving and an increase in the tax wedge
D) an increase in the labor supply and an increase in the tax wedge

Question

Quizplus · Accepted Answer

According to the supply-side view, cutting labor taxes will increase the incentive for individuals to work, leading to an increase in labor supply. This will result in a decrease in the tax wedge, which is the difference between the wage rate paid by firms and the take-home pay received by workers. Cutting VAT will also stimulate demand for goods and services, leading to an increase in employment and output. Therefore, the best choice is A, which suggests that there will be an increase in labor supply and a decrease in the tax wedge.

A Report on the EU Economic Stimulus Plan Suggested That