As the economy declines into recession, the collection of personal income tax revenues automatically falls. This phenomenon best illustrates how a progressive income-tax system
A) increases crowding out in the economy.
B) decreases real interest rates in the economy.
C) offsets the timing problem for ﬁscal policy.
D) serves as an automatic stabilizer for the economy.

Question

Quizplus · Accepted Answer

A progressive income-tax system means that higher-income individuals pay a higher percentage of their income in taxes. When the economy declines into a recession, people often lose their jobs or see a decrease in income, which means they will pay less in income taxes. This decrease in tax revenue automatically helps to stabilize the economy and soften the impact of the recession. This is an example of how the progressive income-tax system serves as an automatic stabilizer for the economy.

As the Economy Declines into Recession, the Collection of Personal