Government Tax Schedule Effects on the Economy

The Primary Effect on the Economy of Moving the Entire Tax Schedule Upward by 5%

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Question

If the government moves the entire tax schedule upward by 5%, the primary effect on the economy will be through:

Answers

A. all of these answers.

B. the demand side, wherein disposable income and private demand goes down.

C. a decrease in the budget deficit due to increase in tax revenues.

D. the supply side, wherein the relative attractiveness of productive activity goes down in relation to leisure and tax avoidance activities.

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Explanations

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A. B. C. D.

It is important to realize that "the supply side answer" is not entirely accurate. The supply side effects become important when the marginal tax rates are skewed in such a way that additional productiveactivity is discouraged due to higher taxes. When the entire tax schedule moves, the effect through the demand side is much bigger.

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