In a country with unusually high tax rates, one might expect that ________.

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BlackTom AI · Accepted Answer

Consider the question about the effects of unusually high tax rates on a country’s economic measurements. 
Option 1: 'GDP might be overstated because the government might avoid running surpluses.' In practice, a government running a deficit or surplus reflects fiscal policy, but GDP is a measure of domestic production and includes government purchases, not fiscal balance. Whether the government runs surpluses or deficits does not inherently inflate or deflate measured GDP in a straightforward way, so this statement is weak as a general expectation. 
Option 2: 'GDP might be understated because its citizens might avoid reporting some of their income.' This ties directly to the presence of an underground or informal economy. When individuals evade reporting income, the measured income component of GDP (and sometimes household spending represented through income proxies) can be lower than the true level of production and economic activity. In high-tax regimes, the incentive to underreport can be stronger, making this a plausible reason for GDP understatement. 
Option 3: 'GDP might be overstated because the government might raise its outlays.' Government outlays (government purchases) are included in GDP, so higher government spending can raise measured GDP. However, this does not typically cause systematic overstatement unless funded in ways that distort accounting, and the statement as a general rule overstates the effect. Moreover, simply raising outlays does not guarantee an overstatement across all contexts, so this claim is less robust as a general expectation. 
Option 4: 'GDP might be understated because its citizens might flee the country.' If residents migrate abroad, domestic production within the country could decline, potentially lowering GDP. This is plausible in the short term for a country with high tax burdens if emigration reduces the labor force and output. Yet this effect depends on the magnitude of migration and the structure of the economy, making it a possible but less universally expected outcome compared to the underground economy effect described in option 2. 
Option 5: 'after tax income should be much higher than that of countries with lower tax rates.' This contradicts the basic logic of taxation: higher taxes generally reduce after-tax income, unless there are exceptional transfers or subsidies. In most typical scenarios, after-tax income would not be higher merely due to higher tax rates, so this statement is incorrect.

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In a country with unusually high tax rates, one might expect that ________.

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ECON*3020*W04 ECON Quiz 1- Requires Respondus LockDown Browser

In a country with unusually high tax rates, one might expect that ________.

View Explanation

Log in for full answers

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ECON3020W04 ECON Quiz 1- Requires Respondus LockDown Browser