A increase in income tax - Essay Example

1) In the Short Run Average Demand will be about the same as consumers continue to spend at about the same rate as before. In the Short Run Average Supply will also stay the same as suppliers will continue to supply at the same rate.In the Long Run Average Demand will decrease due to the fact that consumers will have less to spend. With less to spend on non-necessity items the consumer will attempt to save more.In the Long Run Average Supply will also decrease as less consumers demand products from suppliers; suppliers will in turn cut production.

This cut in production could also lead to a decrease in the workforce because suppliers might cut the workforce in order to maintain profits. If the workforce decreases then there is less spending power for consumers in general and the growth of the economy will decrease.2) The government will benefit most in the short run from a tax increase due to the added revenue but in the long run it can be argued that a tax increase will cause less growth and less revenue for the government. 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 recession.References“Do Lower Tax Rates Really Increase Government Revenue?” DollarandSense.com. Alejandro Reuss. June 2011