An income tax on labor income decreases the ________ of potential GDP and a tax on interest income decreases the ________ of potential GDP.

Question

Quizplus · Accepted Answer

Taxes on labor income decrease the incentive for individuals to work, which in turn reduces the potential output or level of potential GDP, since there are fewer workers producing goods and services. On the other hand, taxes on interest income decrease the incentive for individuals to save and invest, which reduces the amount of capital available for production, therefore decreasing the growth rate of potential GDP.

An Income Tax on Labor Income Decreases the ________ of Potential