If taxes are reduced, will most people save more or less than before?

If taxes are reduced, will most people save more or less than before? Does national saving rise or fall? Explain.

What will be an ideal response?

ANSWER

Lower taxes mean higher disposable income, which should encourage increases in both consumption and saving. Reduced government revenue, given government spending, means a decrease in government saving. Since private saving does not rise as much as the decrease in government saving, national saving falls.