Read the introductory section and the next section ("The Economic Impact of A Tax Cut: The Demand Side") of "Tax Reduction and Economic Welfare," by Richard K. Vedder and Lowell E. Gallaway.

Questions

1. Why might a tax cut (unaccompanied by a reduction in government spending) result in a reduction in investment and economic growth?
2. This statement suggests that a tax-cut might stimulate the economy in the short run. Is this likely under current economic conditions? Explain.
3. In the long run, however, it is suggested that a tax cut unaccompanied by reductions in government spending will reduce investment spending. Explain this argument. Is this argument consistent with the discussion appearing in your text?