By changing the incentives, reductions in marginal tax rates can increase potential output in each of the following ways EXCEPT by encouraging households to:

Question

Quizplus · Accepted Answer

Reducing marginal tax rates can create incentives for households to work more, take more entrepreneurial risks, and invest in more human capital, as they get to keep a greater share of the returns on their efforts. However, it does not directly incentivize households to enjoy more hours of leisure. In fact, if households see a reduction in their tax burden and hence an increase in disposable income, they may choose to work more and consume less leisure. Therefore, A is the correct answer.

By Changing the Incentives, Reductions in Marginal Tax Rates Can