A reduction in the marginal tax rate can cause potential output to increase by:
A)encouraging early entry into the labor market by reducing the incentive to earn advanced degrees.
B)increasing after-tax wage rates and thus allowing workers to work fewer hours.
C)increasing the incentive to invest more in education and earn advanced degrees.
D)increasing government revenues and thus government expenditure.

Question

Quizplus · Accepted Answer

A reduction in the marginal tax rate increases the after-tax return on investment in education, thereby incentivizing individuals to pursue advanced degrees, which can enhance skills and productivity, leading to an increase in potential output.

A Reduction in the Marginal Tax Rate Can Cause Potential