Multiple choice

Which of the following types of tax has automatic stabilising properties?

  1. Progressive Tax

  2. Proportional Tax

  3. Regressive Tax

  4. None of these

Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

It is progressive tax. When there is inflationary pressure due to increase in income and there is a need to contract it, the progressive tax comes to the rescue and contracts the surplus purchasing power from the economy. When the country is faced with falling income, the burden of tax automatically lessens. As the graduated rates apply on income automatically, the state has not to make any efforts on its own.