The implicit assumption behind the Economic Recovery Tax Act of 1981, which cut the individual income tax rate by 25% over three years, was that
A) the economy was on the negatively sloped portion of the Laffer curve.
B) the economy was on the positively sloped portion of the Laffer curve.
C) tax rate reductions will stimulate demand in the economy and move the economy to full employment.
D) tax rate reductions will decrease supply in the economy and therefore choke off the high rate of inflation that the economy was experiencing.

Question

Quizplus · Accepted Answer

The assumption was that the economy was on the negatively sloped portion of the Laffer curve, where reducing tax rates would increase tax revenue by boosting economic activity.

The Implicit Assumption Behind the Economic Recovery Tax Act of 1981