The progressive income tax is an automatic stabilizer with respect to the Federal government's budget surplus or deficit because

Question

Quizplus · Accepted Answer

The progressive income tax is an automatic stabilizer because during periods of output growth, a greater percentage of real income "leaks" from the expenditure stream. This occurs because as incomes rise, individuals move into higher tax brackets and pay a higher percentage of their income in taxes. This reduces their disposable income and decreases their consumption expenditures, which dampens the overall increase in output. Thus, the progressive income tax acts as a stabilizing force that helps to prevent excessive booms and busts in the economy. Option A is incorrect because individuals do not pay taxes when they have a deficit; they pay taxes on their income regardless of whether they have a surplus or deficit. Option C is also incorrect as it contradicts the explanation given above.

The Progressive Income Tax Is an Automatic Stabilizer with Respect