Why the proportional income tax acts as automatic stabilizer?

1.	Why the proportional income tax acts as automatic stabilizer?
Answer» The proportional income tax acts as an automatic stabilizer because it makes disposable income and consumer spending less sensitive to fluctuations in GDP. When GDP rises, disposable income also i rises but by less than the rise in GDP because a part of it is siphoned off as taxes. This helps to 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 stabilizes the economy.

Answer»

The proportional income tax acts as an automatic stabilizer because it makes disposable income and consumer spending less sensitive to fluctuations in GDP. When GDP rises, disposable income also i rises but by less than the rise in GDP because a part of it is siphoned off as taxes. This helps to 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 stabilizes the economy.

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