Final answer:
The claim that an unfavorable temporary book-tax difference decreases taxable income relative to book income is false. Arthur Laffer's principle suggests that lower tax rates can increase tax revenue by stimulating economic activity and broadening the tax base, which can lead to higher disposable income and consumption.
Step-by-step explanation:
The statement in the student's question is false. An unfavorable temporary book-tax difference actually causes taxable income to increase relative to book income in the short term. This situation occurs when expenses are recorded on the company's financial statements before they can be deducted on the tax return, leading to a higher taxable income compared to the book income reported on the financial statements.
Laffer Curve and Tax Revenue
Economist Arthur Laffer proposed the concept that income tax revenue could increase when tax rates are lowered, which is known as the Laffer Curve. This can happen because lower tax rates may encourage more economic activity, leading to a broader tax base. The increase in income and transactions subject to taxation can compensate for the lower tax rate, potentially resulting in higher overall tax revenue.
Tax Rate Cuts and Disposable Income
A cut in the tax rate increases disposable income for individuals and businesses, which can stimulate consumption and investment. This increased economic activity can broaden the tax base, with the potential for higher total tax revenue despite the lower rate.