If the government reduces income tax, what is a likely effect?

• A. Decreased profits
• B. Increased consumer disposable income and sales
• C. No effect
• D. Higher prices

Answer: (B)

When income tax is cut, people keep more of what they earn, so disposable income rises. With more money available, households tend to spend more on goods and services, boosting consumer demand. That higher demand translates into increased sales for businesses, which is the key effect described. While profits could rise if firms convert the extra sales into profit, the immediate and most direct impact of a tax cut is quicker growth in disposable income and sales. The other choices don’t fit because a tax cut doesn’t inherently reduce profits, produce no effect, or guarantee higher prices right away.