Question

Is raising taxes, or lowering taxes the answer to economic growth in your opinion? List both the positives and negatives from raising taxes. Think about what happens with your tax dollars when the government collects more/less. Think about what happens with your spending power when the government raises/lowers taxes?

Answer 1

Raising or lowering taxes can be the answer to economic growth because the change in taxes affect the aggregate demand. The changes in tax leads to change in the consumption level i.e. higher taxes reduces both consumption and individual savings whereas lower taxes increases both the consumption and savings.

Positive of raising taxes are

1) It will help in reducing the fiscal tax

2) Reduces income inequality as the income tax are progressive and government can redistribute it in the form of transfers and subsidy.

Negatives of raising taxes

1) It reduces both the consumption level and the savings thus, lowering aggregate demand.

When the government collects more dollar the size of government purse increases which government redistribute in the form of transfers, subsidy and providing public goods which increases the efficiency of other sectors in the economy.

With higher taxes spending power decreases while the lowering taxes spending power increases because disposable income is higher with lower taxes.