Assertion (A): During a recession, consumption falls by less under a proportional income tax than it would under a fixed tax liability.
Reason (R): Under a proportional income tax, disposable income falls more sharply than GDP during a recession.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A) is true but (R) is false.
Assertion (A): During a recession, consumption falls by less under a proportional income tax than it would under a fixed tax liability. — True. A part of the fall in GDP shows up as a fall in taxes, so households lose less income and cut consumption by less.
Reason (R): Under a proportional income tax, disposable income falls more sharply than GDP during a recession. — False. Disposable income falls less sharply than GDP, because tax payments fall along with GDP.
NCERT (2026-27): “Box 5.1: Fiscal Policy 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. …” |