A decrease in the tax rate is more likely to increase national saving if

Question

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A decrease in tax rate increases disposable income, thus consumers have more money to save or invest. The income effect of a change in the interest rate refers to the impact of a change in interest rates on consumers' income. If the income effect is small, then consumers are less responsive to changes in interest rates, which means that their savings behavior is not influenced much by changes in interest rates. An increase in private saving tends to have a large impact on the capital stock because it provides funds for investment, which increases the supply of loanable funds and reduces the interest rate. Therefore, if the income effect of a change in the interest rate is small and an increase in private saving tends to have a large impact on the capital stock, a decrease in the tax rate is more likely to increase national saving.

A Decrease in the Tax Rate Is More Likely to Increase