If we lower taxes today but raise them in the future, and if = 1:
A) households' wealth rises because they save less.
B) households will increase today's consumption.
C) present wealth remains unchanged and consumption does not change.
D) the government can rely on households to spend more today.
E) saving today will fall and lifetime consumption rises.

Question

If we lower taxes today but raise them in the future, and if  = 1:
A) households' wealth rises because they save less. 
B) households will increase today's consumption. 
C) present wealth remains unchanged and consumption does not change. 
D) the government can rely on households to spend more today. 
E) saving today will fall and lifetime consumption rises.

Quizplus · Accepted Answer

Lowering taxes today but raising them in the future means that households' disposable income today will be higher, but their disposable income in the future will be lower. However, since households are aware that taxes will increase in the future, they are likely to save some of their higher income today in anticipation of the future tax burden. As a result, present wealth remains unchanged, and consumption does not change significantly. Therefore, Choice C is the best answer. Choices A, B and D imply that households will increase consumption, which is not necessarily the case. Choice E implies that lifetime consumption will rise, but this is not certain either.

If We Lower Taxes Today but Raise Them in the Future