Answer to Question #181016 in Microeconomics for eason

Question

How does direct taxes impact on the amount a person saves or spend

Answer 1

Solution:

Direct taxes are those that are imposed directly on individuals, or taxpayers. It is a kind of tax where the impact and the incidence fall under the same category. The burden of a direct tax cannot be shifted by the tax payer to another individual. Such taxes include income tax, property tax, and corporation tax.

Direct taxes largely affect how individuals saves or spends. When the government charges high direct tax rates such as income tax, this will reduce individual’s disposable income and will discourage them to save and spend more. Individuals will be forced to cut on their spending due to limited disposable income and reduce the amount being saved. In fact, some of them will be forced to withdraw some of their savings to sustain their livelihood since their disposable income will not be enough.

 

When there are tax cuts introduced by the government, this will motivate individuals to save and invest more due to an increase in their disposable income. Individuals will increase their consumption due to an increase in their disposable income. Individuals will have extra income to add to their savings and consume other stuff they were not able to afford earlier when they had low-income levels.