When tax rate increases,we expect the investors

Question

Quizplus · Accepted Answer

When tax rates increase, the after-tax return on investment decreases, which means that investors will require a higher before-tax future marginal product of capital in order to justify the same level of investment. As a result, they will adjust their investment decisions accordingly by choosing projects with higher pre-tax returns. Therefore, we can expect investors to require a higher before-tax future marginal product of capital in order to increase investment. Option B is not correct since a higher before-tax future marginal product of capital is required when tax rates increase, not a lower one. Option C is not directly related to tax rate changes, and option D is not accurate since we cannot assume that investors will necessarily increase their investment.

When Tax Rate Increases,we Expect the Investors