The Proportional Income Tax, acts as an ____________, a shock absorber because it makes disposable income, and thus consumer spending purposes less sensitive to fluctuation in GDP.
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Automatic stabiliser
A car’s shock absorber smooths the ride without the driver doing anything. Under a proportional income tax a fixed share of income goes as tax, so the tax collected rises and falls with GDP on its own, without any decision by the government. A budget feature that steadies the economy in this way is an automatic stabiliser, and it works in two steps:
When GDP rises, disposable income also rises, but by less than GDP, because part of the rise is taxed away; when GDP falls, disposable income falls by less.
Consumer spending, which depends on disposable income, therefore swings less than GDP.
Why the other options are incorrect
Option (2) Lender of the last resort — Incorrect. This is a role of the central bank, ready to lend to commercial banks in an emergency; it is not a property of a tax.
Option (3) Banker to commercial bank — Incorrect. This too is a function of the central bank, which holds the reserves of commercial banks and lends to them.
Option (4) Open market operation — Incorrect. It is a tool of monetary policy, the purchase or sale of government securities by the central bank; it has to be decided and carried out, so it is not automatic.
Note: A same/similar question was asked in CUET (UG) in the papers below.
| 2026 | 2025 | 2024 | 2023 | 2022 |
| 15-05 S1 | 22-05 S1* 29-05 S2* | – | – | – |
* A similar question.
NCERT (2025-26): “Changes in Taxes … The proportional income tax, thus, acts as an automatic stabiliser – a shock absorber because it makes disposable income, and thus consumer spending, less sensitive to fluctuations in GDP. When GDP rises, disposable income also rises but by less than the rise in GDP because a part of it is siphoned off as taxes. This helps limit the upward fluctuation in consumption spending. During a recession when GDP falls, disposable income falls less sharply, and consumption does not drop as much as it otherwise would have fallen had the tax liability been fixed. This reduces the fall in aggregate demand and stabilises the economy.…” |