Effects of the Proposed Taxation on demand and supply – conclusion

Opinions concerning government intervention to influence economic outcomes have varied between classical economists and Keynesian economists. Whereas the classical economists argue for a laissez-faire approach, the Keynesian economics argue for the need for the government to apply fiscal and monetary policies to prevent progressive deterioration of the economy. In this report, the effect of the proposed higher taxation for the rich is considered.

According to AS-AD model, higher taxation would lead to shifting of the AD curve to the left. This implies that the government has enhanced revenues while limiting expenditure thus the approach would reduce the deficit in the budget. However, due to the high deficit currently existing, other measures such as reducing tax breaks may be needed to achieve significant reductions in the deficit. Concerning reducing inequality, a higher taxation would have a positive if the government embarks on alternative incentives to spur employment growth. Otherwise, in a case where the higher taxes result into a reduction in the level of investment, inequality may increase due to an increase in unemployment.


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