Consider a closed economy. The profits of private corporations constitute a fraction αof national income. These profits are subject to corporate tax and a fraction β of the net profits is distributed to owners. The remaining profits are invested in theeconomy. To encourage investment, the government proposes to cut the corporation tax. The corporation tax is proportional and so is the regular tax but the rates are notnecessarily the same.
Analyse the effects of the government proposal assuming that wages and pricesare flexible. Will there be any ambiguity about the results?