propensity to tax

propensity to tax

the proportion of NATIONAL INCOME that is taken in TAXATION by the government. The average propensity to tax (APT) is given by:

The marginal propensity to tax (MPT) is the fraction of any change in income that is taken in taxation:

change in taxation change in income total income DIRECT TAXES reduce total income to (net of tax) DISPOSABLE INCOME. Thereafter, a proportion of this disposable income will be spent, and INDIRECT TAXES on goods and services bought will reduce still further the proportion of income returned to the business sector as factor returns. See MULTIPLIER.

A rise in the propensity to tax decreases disposable income for a given income level (increases the taxation withdrawal from the CIRCULAR FLOW OF NATIONAL INCOME), decreasing consumption expenditure, which results in a decrease in AGGREGATE DEMAND and NATIONAL INCOME.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005