Which type of tax acts as an automatic stabiliser in the economy?

The correct answer is Proportional income tax.

Key Points

• Proportional income tax can act as an automatic stabilizer in the economy because it changes in response to changes in income levels.
• This means that as income levels rise or fall, the tax burden for individuals and households changes proportionally, which can help to stabilize the economy during periods of economic growth or recession.
• During periods of economic growth, when income levels rise, the government collects more revenue from income taxes.
• This increased revenue can be used to fund government spending programs or to reduce the budget deficit.
• The government can also use this increased revenue to reduce taxes or to provide tax incentives, which can further stimulate economic growth.

Additional Information

• Professional tax
  • ​ is a tax levied by some state governments in India on individuals who earn an income through professions, trades, callings or employment.
  • It is a form of tax that is collected by the state government, and the rates and rules may vary from state to state. 
  • The professional tax is usually deducted by the employer from the salary of the employee and then remitted to the state government.
  • The amount of professional tax that an individual has to pay depends on the monthly or annual income earned, as well as the state in which the individual is employed.
  • The purpose of the professional tax is to help state governments generate revenue for their various development projects and public services.
  • It is a mandatory tax that must be paid by individuals who are liable to pay it, and failure to do so can result in penalties and fines.
• Wealth tax:
  • ​A tax on an individual's net wealth or assets.
  • A form of direct taxation aimed at reducing wealth inequality.
  • Levied annually based on the value of an individual's assets at a particular point in time.
  • Can be applied to a range of assets including cash, property, investments, and personal possessions.
  • The tax rate is usually a percentage of the net value of these assets and can vary depending on the level of wealth.
  • Used by some countries to generate revenue and fund public services
• Capital gains tax:​
  • Capital gains tax is a tax on the profit earned from the sale of an asset, such as stocks, real estate, or artwork.
  • It is a form of direct tax that is imposed by the government on the capital gains realized by an individual or a business.
  • When a person or a business sells an asset, the capital gain is the difference between the selling price of the asset and the purchase price or the cost basis of the asset.
  • The capital gains tax is then calculated based on the capital gain realized.
  • The capital gains tax rate can vary depending on the asset, the length of time the asset was held, and the taxpayer's income level.