Consumer spending is linked to disposable income. The Trump Administration has proposed tax reform in early 2017 (please see a summary of the proposal at https://taxfoundation.org/trump-administration-tax-proposal/ ), included in the initial summary proposal is to lower the individual tax rate for top-tier earners from 39.6% to 35% and cutting the corporate tax rate to 15%. Explain how this change in taxes affects consumption, aggregate demand, and investment spending. With this in mind, should this be enacted?
Trump administration has signed into law a bill which would reduce tax rate significantly for business class and individuals.
Rise in tax rate reduces disposable income of consumer. Fall in disposable income further brings drop in consumption and aggregate demand. Aggregate demand influences investment decisions.
Hence, If tax rate is reduced it will increase disposable income and consumption of level. Consumption forms important part of aggregate demand. Rise in aggregate demand will make it profitable to invest in economic activities. Hence, investment will experience rise as well.
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