Question

Opponents of tax reforms intended to raise saving argue that such reforms a. favor those with high income, and that saving may not rise because of the substitution effect. b. favor those with high income, and that saving may not rise because of the income effect. c. favor those with low income, and that saving may not rise because of the substitution effect. d. favor those with low income, and that saving may not rise because of the income effect.

Answer 1

Opponents of tax reforms argue that such reforms favor those with high income and may not increase saving due to the substitution effect.

Step-by-step explanation:

Opponents of tax reforms intended to raise saving argue that such reforms a. favor those with high income, and that saving may not rise because of the substitution effect.

In this context, the substitution effect refers to the tendency of individuals to consume more in the present when it becomes cheaper relative to future consumption, while the income effect refers to the reduction in present consumption due to the decrease in the buying power of income caused by lower interest rates. For Quentin, the substitution effect is stronger, leading to more present consumption and less saving.

Answer 2

Option B

Explanation:

In simple words, under such tax reforms the government is intending to raise indirect taxes which will lead to higher prices of certain goods and is also declining taxes on savings. Both of these steps will work as an incentive for individuals to save more.

However a big majority of community is stating that this will only lead to more burden on the weaker section due to higher prices of commodities and will eventually result in lower standard of living for certain individuals.