Sample Essay on Effects of Increase in Tax on Consumer Spending

Tax on Consumer Spending

The government uses different types of tax systems to generate revenues and to boost economic growth. The largest source of revenue for the government is income tax and is levied against interest, dividends, capital gains and income. Therefore, the highest earners end up paying high taxes. However, increase in tax affects consumer spending in different ways including.

Reduced demand for products and services

Increase in tax reduces consumer spending. When taxes are placed on specific products, consumers tend to look for substitutes that are available at cheap prices. For example, in 1991, the government assumed that the rich would always afford to purchase luxury items even with high taxes imposed on the products. However, this was not the case as many rich people opted for what they needed as opposed to wants.

The demand for luxury products also reduced a great deal and as a result, many people lost their jobs. Savings rate also reduced. Therefore, before increasing taxes, it is imperative to consider tax shift to avoid situations where people lose their jobs or losses in businesses.

Reduces disposable income and spending rate

It is imperative to note that consumer spending is often two thirds of GDP. Therefore, increasing taxes reduces disposable income. This means that consumers will only spend the money they have on essentials and no additional amounts. It pushes in the aggregate demand curve as consumers demand less products and services based on the amount of money within their disposal.

Increase in price of goods thus reducing consumer spending

Increase in tax also leads to an increase in the price of goods and services. The demand for the products will therefore reduce as consumers opt for products or substitutes that are available at a cheaper price.

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Poor standards of living

Increasing income tax also means reduced spending and poor standards of living. This is based on the fact that consumers cannot spend any additional amounts within their disposal. It also creates high unemployment rate and budget deficits. Consumers will suffer a great deal and will not get access to quality products and services.

Consumer sentiment

Increasing tax also reduces consumer spending especially among the poor people. This has been proven through consumer sentiment. Research shows that consumer sentiments play a crucial role in determining consumer spending. With increase in tax, consumer spending reduces and causes fluctuations in the economy because of the attitudes of clients or consumers towards the state of economy.

With increase in tax, consumers believe that the economy is deteriorating. If consumers do not have enough confidence in the economy, they will be more reluctant to spend on essentials as well as luxuries. This is a factor that also leads to poor investment because of inactive spending habits.

Increase in tax generally reduces consumer spending because many households spend their income on day to day needs. This means that the income of many households equals their consumption rate as well as savings. On the other hand, many consumers rely on their sentiments before they can spend their income for fear of increase in tax and prices of goods and services.

In conclusion, increase in tax reduces consumer spending because many people prefer to save, and wait till the government cuts down on tax especially on essential products and services.

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