Why do supply-side economists believe that tax cuts can fix the federal deficit?
A.
Lower taxes force less government spending.
B.
Lower taxes improve the nation’s credit rating.
C.
Lower taxes lead to economic growth and more revenue.***?
D.
Lower taxes allow government resources to be invested.
Yes, C.
C. Lower taxes lead to economic growth and more revenue.
The correct answer is C. Lower taxes lead to economic growth and more revenue.
Supply-side economists believe that tax cuts can fix the federal deficit because they argue that lower taxes encourage individuals and businesses to spend and invest more, which leads to economic growth. They believe that this increased economic activity generates more taxable income, ultimately resulting in increased tax revenue for the government. By stimulating economic growth, they believe that tax cuts can address the federal deficit by generating additional revenue without the need for increased government spending.
To arrive at this answer, one could consider the basic principles of supply-side economics, which focus on the importance of incentivizing production and investment to stimulate economic growth. Lowering taxes is seen as a means to encourage individuals and businesses to retain more of their income, which they can then spend or invest. The belief is that this increased economic activity will create opportunities for businesses to expand, resulting in job creation, increased wages, and overall economic growth. As the economy expands, the government can collect more tax revenue from the higher levels of economic activity, helping to alleviate the federal deficit.
It is important to note, however, that the effectiveness of tax cuts in fixing the federal deficit is a topic of debate among economists. Critics argue that tax cuts may not always lead to significant economic growth or increased tax revenue, particularly if the resulting budget deficits lead to increased government borrowing and interest payments. Therefore, the belief that tax cuts alone can completely fix the federal deficit is not universally supported.