The tax bracket assigned to an individual is directly tied to their income level. For example, under the progressive taxation regime, as incomes increase, the share of income that must be paid in the form of taxes also increases.Īs incomes fall, the tax bracket of the taxpayer changes, which means that the share of income they must pay in the form of taxes also decreases. During a period of drastic growth and high-income levels, i.e., an economic boom, they take out money from the economy. How Progressive Taxation Stabilizes Economic CyclesĪutomatic stabilizers achieve a counter-cyclical fiscal policy by their normal functioning. It is different from a pro-cyclical fiscal policy, which prescribes that a government should follow austerity measures during an economic bust and vice versa. It means that the government must intervene to combat volatility during business cycles by increasing spending during an economic downturn. Keynesian economics prescribes that the government follows counter-cyclical spending.
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