Question

How does the corporate income tax influence potential GDP and the real GDP growth rate?

The corporate income tax ______ the level of potential GDP and ______ the real GDP growth rate.

A.

has no effect on; has no effect on

B.

decreases; slows

C.

has no effect on; slows

D.

decreases; has no effect on

2.

Explain why a cut in the U.S. corporate income tax rate might speed economic growth. What does the evidence from Canada and Ireland imply about the strength of the effect?

A cut in the U.S. corporate income tax rate might speed economic growth by ______. The evidence from Canada and Ireland implies that the effect is ______.

A.

strengthening the incentive to invest in new capital; weak

B.

increasing consumer expenditure; weak

C.

increasing consumer expenditure; strong

D.

strengthening the incentive to invest in new capital; strong

   

Answer 1

Corporate income tax can influence the GDP growth rate but does not influence the potential GDP because the potential GDP uses all the available resources in the economy and proposes the maximum output it can produce. Select option C

If there is a decline in the tax rates for corporates, this is likely to improve the confidence of businesses in investment and making new capital investments. The success of tax cut policy in Canada is an evidence against this view. Select option D