The income tax system serves as an automatic stabilizer over the course of the business cycle.

Question

Quizplus · Accepted Answer

The income tax system serves as an automatic stabilizer because as incomes and profits rise during the boom phase of the business cycle, tax revenues increase, reducing the deficit or increasing the surplus, which helps to cool off the economy. Conversely, during recessions or slow periods when incomes and profits fall, tax revenues decline, increasing the deficit or reducing the surplus, which helps to stimulate the economy. This helps to smooth out the shocks of the business cycle and prevent extreme economic downturns or booms.

The Income Tax System Serves as an Automatic Stabilizer Over