Why is the personal income tax considered to be one of the main features of our modern economy that helps ensure against a repeat performance of the Great Depression?


Income tax is considered an automatic stabilizer because tax revenue change with the level of output. The income tax acts as a shock absorber because it makes disposable income, and thus consumer spending, less sensitive to fluctuations in GDP. When GDP rises, disposable income (DI) rises less because part of the increase in GDP is siphoned off by the U.S. Treasury. This leakage helps limit any increase in consumption spending. When GDP falls, DI falls less sharply because part of the loss is absorbed by the Treasury rather than by consumers. So consumption does not drop as much as it otherwise might. Thus, the personal income tax is one of the main features of our modern economy that helps ensure against a repeat performance of the Great Depression.

Economics

You might also like to view...

In a perfectly competitive market, one farmer's barley is

A) completely different from another farmer's barley. B) a perfect substitute for another farmer's barley. C) a monopolized product in that farmer's local market. D) a monopolized product in the national market. E) slightly different from another farmer's barley.

Economics

Assume there is a simultaneous increase in home foreclosures and a decrease in consumer incomes. Based on this information we can conclude, with certainty, that in the market for used single-family homes equilibrium:

A) price will increase. B) price will decrease. C) quantity will increase. D) quantity will decrease.

Economics

If the value of your baseball card collection increases during a year, it would count as income under which of the following definitions of income?

a. The Fisher definition of income. b. The Haig-Simons definition of income. c. The Laffer definition of income. d. The imputed collectible return definition of income

Economics

A tariff can be defined simply as a a. A tariff can be defined simply as a b. tax on exports

c. legal limit on imports. d. legal limit on exports.

Economics