Practicing Success
A tax that acts as an automatic stabiliser - a shock absorber, because it makes disposable income spending, less prone to fluctuation in GDP. That tax is - |
Sales Tax Income tax Gift tax Excise tax |
Income tax |
The correct answer is option (2) : Income tax Explanation : The proportional income tax 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. |