Final answer:
New business taxes on sales revenue could decrease consumption due to reduced disposable income, leading to a potential decrease in equilibrium output and a shift away from full employment, particularly if the economy is not in recession. Conversely, tax cuts in a recession can shift the AD curve rightward, increasing GDP and reducing unemployment without significant inflation.
Step-by-step explanation:
How new business taxes on sales revenue would impact full employment output depends largely on the position of the economy. If an economy is in a recession with output below the full employment level, tax cuts can make sense as they increase consumption, shifting Aggregate Demand (AD) to the right and potentially moving the economy closer to full employment. Conversely, if the economy is already performing well, further tax cuts may lead to inflationary pressures with minimal gains to Gross Domestic Product (GDP).
Considering the economic parameters provided, with national income (Y), taxes (T), consumption (C), and investment (I), it is clear that changes in tax rates would alter the consumption function and thus the equilibrium of output. In this framework, if taxes increase, consumption would typically decrease since there is less disposable income (Y-T), leading to a leftward shift in the AD curve, potentially decreasing the equilibrium output and moving away from full employment.
During the 2001 recession, the U.S. Congress enacted a tax cut, which by increasing consumption, shifted the AD curve to the right, and as a result, real GDP rose and unemployment fell. This effect is maximized when the economy is not at its full employment level of GDP, thereby avoiding significant increases in the price level.