Consider the following statements regarding "Proportional Taxes": 1. Under this system, the government collects a fixed amount of tax regardless of income. 2. Proportional taxes reduce the slope of the consumption function. 3. They act as an automatic stabiliser for the economy. Which of the statements given above is/are correct?

Correct Option The correct option is 2 and 3 only. Explanation A proportional tax is a system where the tax rate remains fixed as the taxable amount increases or decreases. It is distinct from progressive taxation (where rates increase with income) and regressive taxation (where the burden decreases as income rises). Statement-wise Analysis: - Statement 1 is Incorrect. Under a proportional tax system, the rate of tax is fixed (e.g., a flat 10%), but the actual amount collected varies with income. If income increases, the tax paid increases proportionally. A tax where the government collects a fixed amount regardless of income is known as a lump-sum tax. - Statement 2 is Correct. The consumption function describes the relationship between consumption and income. In the presence of a proportional income tax ($t$), disposable income becomes $Y(1-t)$. Consequently, the slope of the consumption function changes from the Marginal Propensity to Consume ($c$) to $c(1-t)$. Since the tax rate ($t$) is positive, the new slope is smaller than the original slope, meaning the consumption line becomes flatter. - Statement 3 is Correct. Proportional taxes act as automatic stabilisers. During an economic boom, incomes rise, and tax collections automatically increase, reducing disposable income and dampening aggregate demand. Conversely, during a recession, incomes fall, tax liabilities decrease automatically, leaving households with relatively more disposable income to support consumption. This counter-cyclical nature helps stabilise the economy without legislative intervention. Key Takeaway: Proportional taxes impose a fixed percentage rate on income, not a fixed amount. They lower the multiplier effect by reducing the slope of the consumption function and serve as automatic fiscal stabilisers.

NCERT Class 12 Economics — Chapter 7: Government Budget and the Economy

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Consider the following statements regarding "Proportional Taxes":

Under this system, the government collects a fixed amount of tax regardless of income.
Proportional taxes reduce the slope of the consumption function.
They act as an automatic stabiliser for the economy.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

A1 and 2 only
B2 only
C1, 2 and 3
D2 and 3 only

Did you get this right?

Solution

Correct Option

The correct option is 2 and 3 only.

Explanation

A proportional tax is a system where the tax rate remains fixed as the taxable amount increases or decreases. It is distinct from progressive taxation (where rates increase with income) and regressive taxation (where the burden decreases as income rises).

Statement-wise Analysis:

Statement 1 is Incorrect.
Under a proportional tax system, the rate of tax is fixed (e.g., a flat 10%), but the actual amount collected varies with income. If income increases, the tax paid increases proportionally. A tax where the government collects a fixed amount regardless of income is known as a lump-sum tax.
Statement 2 is Correct.
The consumption function describes the relationship between consumption and income. In the presence of a proportional income tax ($t$), disposable income becomes $Y(1-t)$. Consequently, the slope of the consumption function changes from the Marginal Propensity to Consume ($c$) to $c(1-t)$. Since the tax rate ($t$) is positive, the new slope is smaller than the original slope, meaning the consumption line becomes flatter.
Statement 3 is Correct.
Proportional taxes act as automatic stabilisers. During an economic boom, incomes rise, and tax collections automatically increase, reducing disposable income and dampening aggregate demand. Conversely, during a recession, incomes fall, tax liabilities decrease automatically, leaving households with relatively more disposable income to support consumption. This counter-cyclical nature helps stabilise the economy without legislative intervention.

Key Takeaway:
Proportional taxes impose a fixed percentage rate on income, not a fixed amount. They lower the multiplier effect by reducing the slope of the consumption function and serve as automatic fiscal stabilisers.

Your note

More from Chapter 7: Government Budget and the Economy

Consider the following statements regarding the "Annual Financial Statement" in India: 1. It is a statutory requirement under the Fiscal Responsibility and Budget Management Act, not the Constitution. 2. It includes estimates for the coming financial year. 3. It distinguishes between the revenue account and the capital account. Which of the statements given above is/are correct?

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With reference to the "Allocation Function" of the government budget, consider the following statements: 1. It addresses the provision of public goods that cannot be provided effectively by the market mechanism. 2. Public goods are characterized by being rivalrous in consumption and excludable in nature. 3. The "free-rider" problem is easily solved by charging a user fee for public goods. Which of the statements given above is/are correct?

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Consider the following statements regarding "Public Provision" and "Public Production": 1. Public provision implies that goods are financed through the budget and used without direct payment. 2. Goods provided by the government must necessarily be produced directly by the government. 3. Public goods may be produced by the private sector. Which of the statements given above is/are correct?

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Consider the following statements regarding "Capital Receipts": 1. Recovery of loans is considered a revenue receipt. 2. Capital receipts either create a liability or reduce the financial assets of the government. 3. Market borrowings are considered non-debt creating capital receipts. Which of the statements given above is/are correct?

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Consider the following statements regarding "Revenue Expenditure": 1. It includes expenditure that does not result in the creation of assets. 2. Interest payments on debt are classified as capital expenditure. 3. Grants given to state governments are treated as revenue expenditure even if they are meant for the creation of assets. Which of the statements given above is/are correct?

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Correct Option

The correct option is 2 and 3 only.

Explanation

Statement-wise Analysis:

Statement 1 is Incorrect.
Under a proportional tax system, the rate of tax is fixed (e.g., a flat 10%), but the actual amount collected varies with income. If income increases, the tax paid increases proportionally. A tax where the government collects a fixed amount regardless of income is known as a lump-sum tax.
Statement 2 is Correct.
The consumption function describes the relationship between consumption and income. In the presence of a proportional income tax ($t$), disposable income becomes $Y(1-t)$. Consequently, the slope of the consumption function changes from the Marginal Propensity to Consume ($c$) to $c(1-t)$. Since the tax rate ($t$) is positive, the new slope is smaller than the original slope, meaning the consumption line becomes flatter.
Statement 3 is Correct.
Proportional taxes act as automatic stabilisers. During an economic boom, incomes rise, and tax collections automatically increase, reducing disposable income and dampening aggregate demand. Conversely, during a recession, incomes fall, tax liabilities decrease automatically, leaving households with relatively more disposable income to support consumption. This counter-cyclical nature helps stabilise the economy without legislative intervention.