To narrow down the focus of the question, I want to know how would one depict a reduction of indirect taxes on the Lorenz Curve of a country. In my opinion, the reduction of taxes will increase the level of inequity and so the Gini Index must increase. Thus, the initial Lorenz Curve of a country must shift outwards. However, I came across a problem where the very opposite has been done. Please explain the flaw in my reasoning.

For more clarity the question is laid out as follows:


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Main Question

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    $\begingroup$ What happens to the rest of the system? Are direct taxes increased accordingly to make up the shortfall, or does the budget deficit increase, or the budget surplus decrease, is some spending cut, or is the gap filled by money-printing? $\endgroup$ – 410 gone Apr 18 '16 at 11:48
  • $\begingroup$ There is no other information given and I don't think that we are allowed to make assumptions. Do you think that the answer is correct, with all the information that I've given? $\endgroup$ – model_checker Apr 18 '16 at 11:59
  • $\begingroup$ @User-3.14 It is difficult to judge what a professor will accept as a correct answer unless the exact model used is identified. $\endgroup$ – Giskard Apr 18 '16 at 13:15
  • $\begingroup$ @EnergyNumbers, I've added the full information. Perhaps this will help in clearing some ambiguity. $\endgroup$ – model_checker Apr 18 '16 at 13:35

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