Final answer:
A tax cut favoring upper-income households is likely to cause income redistribution, increase savings for higher-income individuals, and potentially reduce consumption among lower-income households.
Step-by-step explanation:
A tax cut that lowers taxes for upper-income households while reducing transfers to lower-income households is likely to cause income redistribution. This type of policy typically results in increased savings for those in the upper-income brackets who are more likely to save additional disposable income. At the same time, the reduction in transfers to lower-income households would likely decrease their consumption, as they have a higher marginal propensity to consume out of their income.
While tax cuts can lead to an increase in aggregate consumption and potentially stimulate economic growth when targeted effectively, especially in times of recession, such redistribution could also widen the income gap between higher and lower-income households. It's also important to note that while household savings might increase, a tax cut can lead to a reduction in government savings if it increases the deficit, which needs to be taken into account when considering the overall impact on national savings.