The term income tax is the percentage of income that is taken from a person’s income to fund government expenses. Income tax itself is a direct tax as it directly taken from a person’s earning’s and can be used by the government to cut or increase disposable income to increase or slow down consumer spending. Income tax is also used as a fiscal policy to attempt to eliminate the countries budget deficit. The government have four main economic objectives these include Balance of payments, lower unemployment, steady inflation and steady economic growth.
In the short run a cut in income tax leads to an increase in disposable income for consumers. If consumers have more disposable income they are like to spend more, therefore increasing
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Big businesses then use this invested money to buy capital goods. These capital goods then need workers to use them so it decreases unemployment. With a rise in aggregate demand this will decrease the amount of cyclical unemployment as there will be more demand for workers in a busier economy. Also if there is more investment spending in the UK, then it will mean that businesses will grow and the UK will have bigger firms in the country. This means that there will be more demand abroad for these big businesses to supply for. This leads to an national increase in exports. If there is more exports more money is being brought into the UK economy therefore improving the countries balance of payments. The increase in the national labour supply will mean that there is less inflationary pressures on the country for demand pull inflation because the long run aggregate supply will have increased.
To conclude my judgement I believe that a decrease in the countries income tax does have its positive effect on the government as it increases AD and the country’s GDP, however it does lead to inflationary pressure in the short term if there is too much aggregate demand in the economy as it will lead to demand pull inflation. The extra disposable income for wealthier consumers could be saved and therefore would not contribute to aggregate demand. I also believe