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Chapter 9.docx

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Serge Nadeau

Lecture 9 Impact of a Tax on Investment ( Application 2)  • Increase tax on corporations, corporations invest less ( more expensive) , results in less capital stock, less productivity and so worse standard of living • Investment Tax credit: Something that reduces the amount of taxes to a firm in relation to amount invested Makes it more tempting to invest, a Affects the investment curve, moving it to the right, increasing amount invested &equilibrium • Should Tax laws be reformed to encourage capital investment? -Lowest deadweight loss on a tax is a consumption tax, & Dividend tax is high - We should have high consumption tax and low saving tax Government budget deficits and surpluses • If the government wants to make money, they have to tax SOMEONE • The effect of a government budget deficit (p.179) is that public saving goes down, which means national saving goes down and therefore the saving curve moves to the left, resulting in higher interest rate, and less investment • Governemtn borrowing to finance its budget deficit reduces supply of loanable funds avail. To finance investment ( private), resulting in crowding out • 40 cents from every dollar to pay interest- no money for anything else • The federal government debt to GDP ratrio increased dramatically between 1975 and 1997 ( 40 cents for every
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