The tax wedge is the difference between the
A)amount of taxes needed to balance the federal budget and the actual amount of taxes.
B)amount of taxes needed to pay off the national debt and the actual amount of taxes.
C)pretax and posttax returns to an economic activity.
D)nominal and real interest rates.

Question

Quizplus · Accepted Answer

The tax wedge represents the difference between the pretax and posttax returns to an economic activity. It is the amount of taxes that reduce the wages or return to capital that workers and firms receive after engaging in an economic activity. A high tax wedge can discourage work and investment, which can have negative effects on economic growth. Therefore, governments should strive to keep the tax wedge as low as possible. Choices A, B, and D are incorrect as they do not accurately describe the definition of tax wedge.

The Tax Wedge Is the Difference Between the