According to the theory of supply-side economics, a cut in the tax rate will actually result in an increase rather than a decrease in tax revenues. Which statement best explains how this is supposed to happen?

When the government lowers tax rates, both consumer spending and private investment increase, leading to an increase in economic growth which will in turn contribute to increase government revenue through a higher tax base.

Explanation:

For every dollar that an individual earns, two things happen:

propensity to consume: proportion of total income that individuals decide to spend instead of saving. Consumer spending increases private consumption. propensity to save: proportion of total income that individuals decide to save instead of spending. All the money individuals save become private investment.