Column: Focus on GST and DTC first
Second, we need to be mindful of the adverse supply shock that a high tax rate on high earners could create. The average propensity to save is usually high for high-income individuals. So, a higher tax burden on the rich is likely to decrease the aggregate saving and investment rate in the economy, leading to a reduction in aggregate output and employment in the economy. At a time when growth in national output is falling, and business sentiments are low, implementing the above proposal in the upcoming Budget could further depress the economy.
Third, the relationship between tax rates and tax revenues might not be linear. It will be important to look at the effect of a rise in the peak tax rate on the taxable income of the economy. A higher marginal tax rate may not necessarily generate additional revenue, particularly if people respond in ways that result in less taxable income. There are several possibilities of how the rich might behave when their taxes rise. International evidence suggests that a higher peak tax rate could reduce work effort and business creation; a larger share of the earnings could be taken in forms that are taxed less; and money
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