Quiz 18: Taxation and Resource Allocation

Business

Tax rates in the United States are relatively higher. Higher taxes lead to reduce the consumption of goods and services. Consumption is a component of aggregate demand. Aggregate demand falls due to decline in the consumption expenditure. Thus, federal government should continue cutting taxes. Higher payroll taxes affect the willingness to work in the United States. People have to sacrifice larger portion of their income due to higher taxes. Reduction in the taxes is beneficial to stimulate the economic growth.

The marginal tax rate is calculated by considering the changes in the tax rates. Average tax rate is measured by considering the taxable income and the tax amount. The following is a table which indicates the measurement of marginal and average tax rate. img In the above table, average tax rate changes according to changes in the tax amount and income level. An increase in income is greater than the increase in taxes. Therefore, average tax rate diminishes as income rises. Marginal tax rate also declines considering an increase in the level of income. The average tax rate diminishes as there is an increase in the income level. Therefore, the tax is considered as regressive. In terms of regressive tax, the average tax rate diminishes according to an increase in the level of income.

Critics have argued that reduction in taxes were regressive because the proportionate gains to poor people were small. Rich people have benefited more from the tax cuts. Reduction in taxes were excessive in magnitude because it has reduced the distributional befits to poor. Normally, taxes are used to redistribute the income from rich to poor. One would agree with the critics because tax cuts lead to reduce the government revenue. Reduction in the government might affect the public services which are usually provided to middle-class and poor people.

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