Answer to Question #271957 in Macroeconomics for Nick

Question

How would each of the policies listed in parts (a) through (b) change the Tanzi–Olivera effect?

Requiring monthly instead of yearly income tax payments by households.

Assessing greater penalties for under-withholding of taxes from monthly paychecks.

Decreasing the income tax and increasing the sales tax.

Answer 1

(a) Requiring monthly instead of yearly income tax payments by households.

It is a must for individuals, corporations, enterprises and all other establishments that create revenue to pay taxes. The Income Tax Act governs the collection, recovery and administration of income tax in India. The government uses this tax revenue for a variety of purposes, including infrastructure development and salary payments to state and federal government personnel. Income tax assists the government in generating a consistent source of revenue that is then used to further the nation's development. Income tax is calculated on a yearly basis, despite the fact that it is paid monthly from monthly earnings. The amount of income tax a person must pay is determined by a variety of factors.

(b) Assessing greater penalties for under- withholding of taxes from monthly paychecks.

The IRS imposes an underpayment penalty on taxpayers who do not pay enough of their estimated taxes or do not have enough deducted from their salaries or who pay late. Individuals must pay either 100% of the last year's tax or 90% of this year's tax to avoid an underpayment penalty. The level of the underpayment penalty is determined by the amount owed and the length of time it has been past due.

(c)Decreasing the income tax and increasing the sales tax.

Lowering taxes, as one may anticipate, increases disposable income, allowing consumers to spend more money, so increasing GNP. As a result of lower taxes, the aggregate demand curve is pushed out, as consumers seek more products and services with their increased disposable income.