Supply-Side Economics and High Marginal Tax Rates | CFA® Level 1 Exam Prep

Supporting Supply-Side Economics

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Question

Which of the following lend support to supply-side economics?

I. High marginal tax rates discourage additional work effort and reduce productivity.

II. High tax rates increase the costs of supplier resources, leading to inflation.

III. High tax rates affect adversely the efficient channeling of capital.

IV. High marginal tax rates skew the demand preferences of consumers geared toward non-productive activities.

Answers

A. I, III & IV

B. I & III

C. I & IV

D. I, II, III & IV C

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Explanations

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A. B. C. D.

Explanation

Marginal tax rates are central to the effects postulated by Supply-side economists. According to this theory, an increase in marginal tax rates decreases the incentive to work. People to shift away from productive work and toward more leisure. Non-productive activities explicitly directed toward avoiding taxes increase and projects are selected at least partly due to their tax benefits and not necessarily due to their intrinsic merits. This leads to inefficient channeling of capital resources.

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