The overall sum declines when individual incomes fall due to factors like failed investments, job losses, or a recession. Another form of automatic stabilizer is the introduction of a progressive taxation structure, in which the share of a person's income is withheld as taxation grows in tandem with the person's income level. Some popular automatic stabilizers are income taxes on individuals, transfer systems like welfare and unemployment insurance, and progressive graduated corporate tax schemes. It is the goal of this kind of fiscal policy to mitigate the impacts of economic cycles without resorting to supplemental authorization from policymakers or the government but rather by making use of the economy's normal operations.ĭue to their independence from external stimuli, automatic stabilizers have been given this moniker. Here, we'll compare and contrast automatic stabilizers with arbitrary government action to see which is better suited for a given economic situation. You'll have a better handle on the economy and be able to make more educated financial decisions if you're familiar with these policies. Governments may take several economic policies, including automatic stabilizers and discretionary policies. The rules often affect customers' ability to spend, which has repercussions for the economy. It's possible that to fund certain programs, the government may need to make changes to the country's fiscal policy in areas like taxes. “ The Response of Household Consumption to Income Tax Refunds.” American Economic Review 947 – 95.During times of economic instability, governments may be forced to take drastic actions. M acroeconomic Theory New York: Academic Press. It can not be considered as the ultimate economic analysis and its existence can be overrun by changes in policies, markets and expectations (Souleles, 1999). Their main weakness is that they do not consider other micro-foundations in economics and they also ignore rational expectations in an economy. They are not also immune to changes in policies, markets and the peoples’ expectations. Many economists argue that though the automatic stabilizers exist, they only function in the short term and cannot be relied upon in long term economic situations. However, recessions and booms are also influenced by world wide currency fluctuations and these change the importing and exporting behavior of the domestic economy in general (Sargent, 1979). While importing, the level of money in the domestic economy generally goes low. In economic booms, people and the corporations marginal propensity to import increases, likewise in economic recessions the marginal propensity to import decreases. This ultimately means that the government pays out more in recessions than in economic booms. The number of unemployed and those in need of welfare benefits increase during a recession. It is the government responsibility to pay welfare and unemployment benefits to its citizens. So in general if the national income is high so is the tax the government will receive. Also the corporate taxes paid to the government will also decrease because with low national income so is the low profits the corporate gain. If the income decreases eventually the average tax will decreases. This is because as an individual’s income rises, so does the average tax paid to the government. Induced taxesĭuring recessions the tax revenue decreases proportionately to the national income. Also in imports the government decreases the import of goods in recessions and increases them in booms (Sargent, 1979). In transfer payments the government will have to reconsider its payment of transfer payments in booms and recession because various factors change in booms and recessions. In induced taxes it generally sets the taxes at a lower rate in a recession because many taxpayers have low income levels. The existence of an automatic stabilizer lessens the multiplier and hence it aides in decreasing fluctuations in the real national income, when changes in usage of the national income occurs.Īn automatic stabilizer helps in resettling induced taxes, transfer payments and imports and exports. It helps in keeping the economy stable because it keeps the import at low levels during recession hence ensures that the national income is spent domestically and not in foreign markets.Īny practices or institution in a domestic economy that helps in the reduction of fluctuations in the economy by manipulating the money in circulation and available for spending otherwise known as disposable income is an automatic stabilizer (Souleles, 1999). It uses a multiplier to keep the national income at high levels even when the government incurs a deficit during an economic recession. An economic stabilizer is an economic policy that automatically rises and falls to counter immediate trend without necessarily involving the government.
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