Which is a typical effect of a cut in personal income tax?

• A. Decreased disposable income
• B. Higher taxes on corporations
• C. More disposable income leading to higher consumer demand
• D. No change in demand

Answer: (C)

A cut in personal income tax puts more money in people’s pockets, increasing their disposable income. With more take‑home pay, households typically spend more, especially on goods and services they want now. The extent of the rise in spending depends on the marginal propensity to consume—the share of any extra income that people spend rather than save. In general, this boosts overall consumer demand in the economy in the short run, potentially lifting output and employment. It may also be partly saved, but the dominant effect described is higher consumer demand. It doesn’t directly raise corporate taxes, and it isn’t consistent with no change in demand.