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 earners are taxed at a higher rate compared to lower-income earners. During a recession, when incomes decrease, the amount of taxes collected also decreases automatically. This means that the government has less revenue, but it also means that taxpayers have more money to spend, which can help stimulate the economy. This function of the progressive income-tax system is known as an automatic stabilizer, as it helps to stabilize the economy during a downturn without the need for additional policy actions.

As the Economy Declines into Recession, the Collection of Personal