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A increase in income tax - Essay Example

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This cut in production could also lead to a decrease in the workforce because suppliers might cut the workforce in order to maintain…
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A increase in income tax
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A increase in income tax

Download file to see previous pages... As explained above if consumers cut back, the suppliers will reduce production while laying off workers, and then consumers will have even less money to spend in which case the cycle will repeat and thus begins a recession/depression like sequence.
Consumers lose the most from this in the long term as explained, purchasing power will continue to drop and some workers will eventually lose their jobs which can send more shockwaves through the economy.
Example: In the housing bust, consumers lost their jobs in the recession and were not able to pay for mortgages, thus defaulting. Banks then reduced their lending and consumers continued to reduce spending. Due to this suppliers had to cut their supply and more workers had to be made redundant. This cycle continued and spread throughout not only the United States but the world as banks defaulted on their debt.
3) If the government is attempting to increase government revenue an alternative is to decrease the tax rate to a maximized level where businesses and consumers would want to spend more and thus cause more revenue in the long term and the government would be receiving more revenue than at the previous tax rate.
4) A tax rate increase definitely affects the GDP and GNP due to the loss in production the aforementioned cycles would create. In the short run the tax increase doesn’t affect the GDP and GNP but in the long term Consumers would spend less and thus suppliers would produce less and lay off workers, and consumers would spend even less creating a vicious cycle that causes a ...Download file to see next pagesRead More
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