Question

Fiscal policies are those which are enacted and changed by the government which majorly involves changing the government spending in the economy or changing the tax rates. Let us consider one of the most important taxes, the income tax. An income tax is a proportion of the income that you have to pay as taxes to the government. Since, the tax is progressive, the higher the income, the higher is the tax and thus it affects you as an individual directly. If you make 100,000 a year and the tax rate for your income is 50% than you are left with $50000. My mother usually pays taxes and a lot of the times owes because of her business. It impacts me because when business is down she still owes taxes.

HOW WOULD I REPLY TO THIS?

Answer 1

A reduction in the tax rates boost demand by increasing disposable income and by encourages the small as well as large businesses to invest and hire more. An increase in taxes will do the reverse. When the tax policy is progressive it requires individuals with higher wealth and incomes to pay at a higher rate compared to individuals with lower incomes. Although the government tends to reduce disparities in the distribution of wealth and income however it dampens incentive to work as it in my case. Since my mother is paying 50% of her income in the taxes; thus she is left with less disposable income for her family. When the business is not working well, the imposing of taxes is less because the income is also less from business. Moreover the business operating at a loss doesn’t have to pay income tax. Thus during boom only the business will pay taxes and during losses my mother can deduct any loss the business from any other income for the year as she is the sole proprietor. Also losses from business can usually be used to decrease the taxable income in the future.