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Consider two policies: a tax cut that will last for only one year and a tax cut that is expected to be permanent. True or False: A tax cut that will last for only one year will stimulate greater spending by consumers than a tax cut that is expected to be permanent. True False

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Answer: False

Explanation:

A short term tax cut will not affect spending as much as a permanent tax cut.

With a short term tax cut, people will know that they will have to go back to paying higher taxes in a short while and so will spend less so that they may be able to afford the higher taxes when they are reimplemented.

If a tax cut is long term however, consumers will spend more because they do not have to worry about having to afford to pay higher taxes after the year expires.

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