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EconActive Solutions (CNN News Questions)
Chapter 12: Tax Negotiations: FP1M02A1
- Why does a cut in the capital gains tax encourage economic growth?
- Name other ways that Congress uses tax laws to promote certain behavior.
Answers:
- A cut in the capital gains tax encourages people to save more because they are not penalized as much for making a profit on (for example) a profitable stock. As savings rise, the amount of loanable funds rises. Interest rates fall and businesses want to borrow more money to buy new machines and build new facilities. Physical capital is a determinant of productivity. As workers have better facilities and machines to work with, productivity rises, output per person rises, and economic growth can occur.
- Example: Congress allows deductions for charitable contributions. This encourages people to give to the charity of their choice.
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