In: Economics
Using the aggregate expenditure and injection-leakage approach, explain the effects of a decrease in proportional tax on equilibrium income.
Proportional tax is a fixed tax with no change if the taxable
base amount increases or decrease. Here the marginal tax rate is
equal to the average tax rate. Under proportional tax the lower
income group people are tend to spend greater amount or percentage
of their income than the higher income group people. If the
proportional tax will fall down, the consumption pattern of the low
income people will increase. Because their level of disposable
income will increase with a fall in the tax rate.
The proportional tax does not have adverse effect on incentive of
the workers and the saving of tax payers. With the fall in
proportional tax rate, the canon equality can be maintained in a
lower sense. This will increase the saving rate of low income
people. On the other hand, it is a leakage to the government
expenditure. With fall in tax rate, the saving rate will increase.
This will reduce the amount of money in circulation and the revenue
of the government will fall down.