“The more progressive a tax system, the greater is the economy’s built-in stability.” Explain this statement for both recessionary and peak phases of the business cycle.

What will be an ideal response?

A progressive tax would take a progressively greater proportion of rising incomes during the peak phase of the business cycle which means it would dampen spending increases and aggregate demand which, in turn, reduces inflationary pressures. On the other hand, a progressive tax would take proportionately less away from declining incomes during a recessionary phase allowing disposable income to fall less rapidly than real GDP. Therefore, aggregate demand would decline less rapidly than GDP and the magnitude of the spending decline that might occur in the absence of the tax would be reduced.