An increase in the tax wedge associated with a given economic activity will decrease the level of that activity.

Question

Quizplus · Accepted Answer

The tax wedge is the difference between the pretax and post-tax return to an economic activity. When the tax wedge increases, the post-tax return is reduced, making the activity less profitable and decreasing the level of that activity. Therefore, an increase in the tax wedge is likely to decrease economic activity.

An Increase in the Tax Wedge Associated with a Given