Consider the following quote: “You cut taxes and the tax revenues increase.” (President Bush, in a speech in New Hampshire on 2/8/2006). Explain the economic rationale underlying this statement using the concepts discussed in class, ignoring possible macroeconomic growth effects (2-3 sentences).
Would the elasticity of taxable income in the above example need to be larger or smaller than 0.5 in order for the statement in Part C to hold? Why?