A report on the EU economic stimulus plan suggested that "... Governments must consider ... cutting VAT [value added tax] and labor taxes ..." 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 the labor supply and an increase in the tax wedge
D) an increase in saving and an increase in the tax wedge

Question

Quizplus · Accepted Answer

Reducing VAT and labor taxes decreases the tax wedge, which can incentivize more labor supply according to supply-side economics.

A Report on the EU Economic Stimulus Plan Suggested That