It has been argued that, "A tax cut must be followed later by a tax increase to pay for the resulting deficit" is the self-fulfilling prophecy of those who use it to predict that an income windfall from a tax reduction must be temporary. The argument can be supported by
A) appealing to forward-looking consumption theory, which predicts that a temporary increase in income produces only a small increase in consumption.
B) noting that small consumption increases produce very little economic stimulus.
C) recalling that larger than expected gaps between actual and potential GDP mean larger deficits spawned by enlarged transfer programs and reduced tax revenues.
D) all of the above.
E) none of the above.

Question

Quizplus · Accepted Answer

The argument can be supported by all the given options: A) Forward-looking consumption theory suggests that a temporary income increase leads to a small consumption increase, implying that a tax cut seen as temporary won't significantly boost consumption. B) Small increases in consumption lead to minimal economic stimulus, reinforcing the idea that a temporary tax cut won't have a lasting positive economic impact. C) Larger gaps between actual and potential GDP can lead to larger deficits, which supports the argument that a tax cut (leading to reduced revenues) may necessitate a future tax increase to cover the deficit.

It Has Been Argued That, "A Tax Cut Must Be