How one percent decrease in income tax by govt. effect revenue and contribution to economic welfare

The Case:

Public revenues are received by Government from different sources like taxes (income and sales tax), administrative activities which include fines, fees, grants and gifts etc. Furthermore, it is an important tool of the fiscal policy and is the opposite factor of government expenditures. Government need to perform various functions in the field of political, social and economic activities to maximize social and economic welfare. In order to run the economy in a better way, government needs to have a large amount of revenues. As tax payers are major contributors of public revenues, if we categorize the tax payers according to their percentage of tax paid we will find that the richest pays more and the poorest pays less. Suppose last year total income tax revenue was 700 billion collected from all different income groups.

Given below, the categories of income groups with percentage of each category in population and their total income tax revenue.

Categories Percentage of each category in population Pays (Total Income tax revenue)
The richest 7% 57% (399 billion)
The middle class 17% 25% (175 billion)
The lower middle class 27% 13% (91 billion)
The bottom (poor) 49% 5% (35 billion)
Keeping in view the above case analyze that how a decrease of one percent in income tax by government will affect the revenue and its contribution towards economic welfare? Explain logically
Asked Feb 17, 2015

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