The Federal corporate income tax

Question

Use the circular flow model to confirm this assertion for a 2% reduction in the Federal corporate income tax.

Answer 1

Business taxes will be reduced. Business owners will receive a larger percent of the money income. If businesses use the increased profits to buy capital goods, labor and the owners of the other resources could benefit. If the reduction in the corporate income taxes results in a decrease in government spending and an increase in corporate spending, there would be a reallocation of resources. If the economy is experiencing unemployment and government spending does not decrease, there could be an increase in spending if businesses increase their spending on capital goods.