Quote:
Originally Posted by Tutankhamen
Q6. High tax means large disincentives to productive efforts, that aggregate supply and tax revenues are both restricted. Give your argument for a just tax system. (2006)
i) High tax --> Disposable income falls --> AD shifts down--> lowering both the price level and the National income (Y) leading to a deflationary gap (start at full employment)
ii) Higher tax rate means higher tax revenue, which could finance higher government spending, assuming the increased Gs completely off-sets fall in AD and shifts the AS curve rightwards- it will eliminate the deflationary gap, decrease the price level but increase the National income.
iii) Given a developing economy like Pakistan, the govt is most likely to tax consumption rather than saving, which by implication means a fall in the i.r (can be shown through IS-LM or Liquidity preference,) which could in turn induce higher investment in later years.
|
i think (although i may b wrong according to others) the reasoning we are supposed to give is already there in the ques.ur reasoning n logic arent wrong but they may not apply here.
"High tax means large disincentives to productive efforts,"here its presumed that the tax is being applied on savings n consequently inv. so ur 3rd point is not relevant here+the question isnt particularly about pakistan.
"that aggregate supply and tax revenues are both restricted."again its presumed that tax revenues arent much so no need to add the 2nd point.
now as far as ur 1st point is concerned, the question isnt addressing inflation explicitly+fall in AD doesnt necessarily lead to delationary gap n dont u think the question is focussing the supply side..
i think ur answer should directly focuss the ques. so if we proceed like this.
large tax means lower savings n disincentives for investment..this will affect the supply side of the economy..AS will lower n since economic activity will reduce, we assume that tax revenues would b lower.then give ur arguments about an ideal tax system(having a broad base, lesser burden on poor..here u may giv pros n cons of various types of taxes to make arguments+add examples to verify ur arguments) n i dont think the types of taxes n their characteristics should b written straight away..it gives the impression tha u r just reproducin the crammed stuff .. n this question is essentially theoretical n natrure..
so what do u say?