Question : Supply-side personal income tax cuts expected to work by increasing : 5006
Supply-side personal income tax cuts are expected to work by increasing work incentives. Which of the following explains why such tax cuts might not have the expected effect?
Workers may use their increased real income to purchase more leisure, and thus labor supply will not increase.
Firms will be able to reduce wages when income tax rates fall, since real wages are now higher.
Workers do not respond to change in tax rates since they have to work anyway.
Firms will invest more and replace workers with capital when there are income tax cuts.
Since there are rational expectations, it will be expected that tax cuts are only temporary.