1/4/2024 0 Comments Flat tax definition economics![]() ![]() However, if higher tax leads to lower wages, then a worker may feel the need to work longer hours to maintain his target level of income. The substitution effect of a higher tax is that workers will want to work less. Higher tax leads to lower wages – and work becomes relatively less attractive than leisure. However, there are two conflicting effects of higher tax Either workers chose not to do overtime or even leave the labour market altogether. Higher income tax reduces the take-home pay and can reduce the incentive to work. However, if the government spend the tax revenue – overall aggregate demand (AD) will not be affected. This is likely to lead to lower levels of household spending and lower levels of household saving. ![]() Those paying income tax will be left with less discretionary income to spend after income tax has been deducted. For example, it may be necessary public sector investment (repairing roads) or it could be to fund shortages in pension funds) The impact depends on what government spend the money on. The main purpose of tax is to raise income for the government which can lead to higher spending on health care and education. If there is an increase in income tax, what impact does it have? In the UK, the basic rate of income tax is 20%. Taxation can have an impact on many aspects of the economy, including: Higher income tax can enable a redistribution of income within society, but may have an impact on reducing the incentives to work and supply labour.For example, higher taxes on carbon emissions will increase cost for producers, reduce demand and shift demand towards alternatives.Taxation on goods, income or wealth influence economic behaviour and the distribution of resources. ![]()
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