Compared to a permanent reduction in tax rates, a temporary tax cut will generally
A) exert a larger impact on output and employment because its effects are immediate, long-lasting, and do not add much to the national debt.
B) exert a smaller impact on output and employment because the temporary cut will not exert much impact on long-term income or the incentive to earn.
C) exert a larger impact on output and employment because the temporary tax cut will lead to a larger budget deficit.
D) exert an identical impact on output and employment because the incentive effects will be the same regardless of whether the tax cut is temporary or permanent.

Question

Quizplus · Accepted Answer

A temporary tax cut may provide a boost to the economy in the short term, but it is unlikely to have a significant impact on long-term economic growth or the incentive to work and invest. This is because taxpayers know that the temporary tax cut will expire and thus they will have to begin paying higher taxes again at some point in the future. As a result, they are unlikely to change their long-term behavior in response to the tax cut. In contrast, a permanent reduction in tax rates provides an ongoing incentive to work, invest, and save, which can lead to sustained economic growth over time.

Compared to a Permanent Reduction in Tax Rates, a Temporary