Why proportional income tax acts as automatic stabilizer?
Answers
The purpose of an automatic economic stabilizer is to prevent the negative consequences related to unexpectedly high growth rates or recessions. For example, as an individual taxpayer earns higher wages, his additional income may be subjected to higher tax rates based on the current tiered structure. If wages fall, the individual will remain in the lower tax tiers as dictated by his earned income.
Proportional income taxes work as automatic stabilizer when it increases disposable income during economic depression and reduces disposable income during economic booms.
It helps in regulating the amount of cash flow in the hands of the consumer and prevents sudden rise or fall in market prices and subsequently demand and supply of goods in the market. Governments impose these taxes to stabilise the economy.