Final answer:
The statement that savings directly increase profits and are taxed is false. Savings by reducing expenses can lead to higher profits, but it is the increase in profits that is taxed, not the savings themselves. Furthermore, tax policies and capital gains taxes affect overall savings and investment in the economy.
Step-by-step explanation:
The statement that savings (reducing expenses) increase the profits of a firm and therefore they are taxed is false. While reducing expenses does indeed have the potential to increase profits, these savings or cost reductions in themselves are not directly taxed. Rather, it is the resulting increase in profit, if any, that is subject to taxation. Not all savings lead to a dollar-for-dollar increase in profits as other factors may impact a firm's net income.
Furthermore, laws that seek to increase the quantity of savings by offering tax breaks or altering the return on savings can affect the overall amount of savings in the economy. The impact of these laws will depend on whether the supply curve for financial capital is elastic or inelastic. If elastic, a higher return on savings could significantly increase the quantity saved; if inelastic, the increase would be smaller. Additionally, the government taxes gains from private investment, but lower capital gains taxes can encourage investment and therefore economic growth. Lastly, tax cuts can influence both household savings and government deficits, which in turn impacts overall savings in the economy.