Senate Approves Obama Tax Cut Plan

The U.S. Senate has passed legislation extending Bush-era tax cuts for high-income earners to

middle-class Americans earning up to $250,000 per year.

Source: Financial Times, July 26, 2012

Fact: Middle and low-income earners spend almost all their disposable incomes. High-income

earners save a significant part of their disposable incomes.

a. Explain the intended effect of extending tax cuts for middle-class Americans but not for

high-income families. Draw a graph to illustrate the intended effect.

b. Explain why the effect of tax cuts depends on who receives them.