What is the impact of proportional taxes?

Question

Question

This question was previously asked in

SSC CHSL Exam 2024 Tier-I Official Paper (Held On: 10 Jul, 2024 Shift 3)

Answer 1

The correct answer is Reduces the autonomous expenditure multiplier

Key Points

Proportional taxes are taxes that maintain a consistent rate regardless of income level.
These taxes reduce the autonomous expenditure multiplier because they decrease disposable income, leading to lower consumption and investment.
The autonomous expenditure multiplier is a measure of the change in aggregate output caused by a change in autonomous spending.
When disposable income is reduced, the overall consumption in the economy decreases, thereby reducing the multiplier effect.
In contrast, the induced expenditure multiplier is influenced by changes in income levels and marginal propensities to consume.
Proportional taxes do not increase the induced expenditure multiplier; rather, they generally have a contractionary effect on the economy.

Additional Information

The marginal propensity to consume (MPC) is the fraction of additional income that a household consumes rather than saves.
Proportional taxes do not directly affect the MPC but can influence overall consumption patterns by reducing disposable income.
Understanding the impact of different types of taxes on multipliers is crucial for designing effective fiscal policies.
Fiscal policy tools, such as altering tax rates and government spending, are used to manage economic activity and achieve macroeconomic objectives.
Effective fiscal policy can help stabilize the economy, promote growth, and reduce unemployment.