ABSTRACT
A rise in National Income will push taxpayers into higher tax brackets so that the average tax rate t will increase; similarly, a fall in income will reduce t. Under a system of progressive taxation, increasing factor incomes will be accompanied by a rise in t, so that a smaller and smaller proportion will be left in private hands as disposable income; the rise in consumption will fall further and further behind the rise in National Income. Changes in income taxation are only one of the methods of compensatory finance open to the government. A second alternative is to alter indirect taxes, such as sales taxes and excise taxes on liquor, tobacco, and gasoline. Changes in taxation have been assumed to affect only consumption, leaving investment unchanged. In addition to altering goods-and-services expenditure, the government may also change the amount of income transfers, for example by raising social security benefits.
