A cut in the income tax rate ________ the tax wedge and ________ employment, saving, and investment.

Question

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When income tax rates are cut, the amount of money workers get to keep after paying taxes increases. This reduction in the tax wedge incentivizes people to work more, save more, and invest more, which leads to an increase in employment, saving, and investment. Therefore, reducing income tax rates decreases the tax wedge (the difference between what employers pay for labor and what employees take home) and increases employment, saving, and investment.

A Cut in the Income Tax Rate ________ the Tax