Question

Evaluate how a change in the level of taxes can influence in economy. What effect does this have on savings positive/negative? Why?

Answer 1

When the country increases the tax levels from low to high,then the tax revenue for the country will rise which can help the economy to flourish as the government can spend the additional tax revenues for the economic development. In this the savings rate will be very positive as the spending will cause the people to pay more taxes for the goods and services. If he country permits some tax exemption for the savings in tax oriented saving schemes, savings will more likely be positive.

When the country decreases the tax levels from high to low, then the tax revenue gets decreased for the country. This will affect the economic growth as the country will have less amount to spend for the welfare and growth. In this case, savings rate will be negative as there is no motive to save for the tax based schemes and the motive for buying goods will be more. When the consumption increases, it can make the increase in GDP for the country.