Question on: JAMB Economics - 2003
The effect of an increase in the personal income tax is to
A
reduce unemployment
B
raise the absolute price level
C
reduce the disposable income
D
distort the economy
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Correct Option: C
An increase in personal income tax leads to a decrease in disposable income. Here's why:
* **Personal Income Tax:** This is a tax levied on an individual's earnings.
* **Disposable Income:** This is the income remaining after taxes and other mandatory deductions are taken out.
* **The Relationship:** When the tax rate increases, a larger portion of an individual's income is paid to the government as tax, leaving less income available for spending or saving. This decrease is the reduction in disposable income.
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