Suppose that interest income is exempted from taxation,which costs the Treasury $100 billion in tax revenues,while at the same time transfer payments are reduced by $100 billion.Together,these two changes in fiscal policy ________ national saving while moving the distribution of income toward greater ________ .

Question

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Exempting interest income from taxation benefits those with higher incomes who are more likely to earn such income, thus increasing inequality. Reducing transfer payments, which typically benefit lower-income individuals, also increases inequality. Both actions do not affect the total national saving directly since the reduction in tax revenue is offset by a reduction in government spending.

Suppose That Interest Income Is Exempted from Taxation,which Costs the Treasury