| Consider the following statements, |
| 1. The phenomenon where people push up to the tax bracket, due to inflation, resulting in higher taxes paid and reduced spending by individuals. This is known as fiscal drag. |
| 2. Fiscal drag is associated with Indirect tax. |
| 3. Laffer curve talks about the threshold level of taxes, up to which it can be increased without bringing counter- productive effects. |
| 4. Philips curve deals with tax rate and revenue generation. |
| Which of the statements) given above is/are correct? |
A) Only 1
B) 1 and 3
C) 1, 2 and 3
D) All of these
Correct Answer: B
Solution :
[b]The statement 1 gives the definition of fiscal drag. Fiscal drag is generally associated with progressivity of taxes, which is feature of direct taxes. Indirect tax is regressive in nature. Also, Laffer curve deals with tax rate limit and the revenue generated. It says that after a particular level, the tax rate increase lowers tax revenue rather than increasing it. Philips curve deals about the relationship between the level of unemployment and rate of change of wage rates.
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