Meaning Of Disposable Income
A disposable income is an income left after deducting current income taxes and social security charges from the gross income.
In this statement, gross income includes salary, wages, dividends received, interests received rent and net profits earned from the business. And on the other hand, income taxes and social security charges involve the amount to be paid for rent or mortgage, utility bills, insurance premiums, food, clothing, credit card bills, income taxes or any such expense.
Meaning Of Tax
Tax is a mandatory payment of a particular amount levied by the governmental organisation on the taxpayer to provide funds to the government for spending in the growth of the country and to meet public expenditure.
Mainly there are two types of taxes direct tax and indirect tax
Direct Tax: direct tax is a tax levied on income on an individual or corporation and it is paid by the person on which it is imposed. A person has to file a tax return mandatorily. It acts as a substantial document, for example, to take a loan even though it’s a bad credit loan, but the issuer will always demand the income tax return receipt.
Indirect Tax: indirect tax is the tax which is levied on goods and services but in this type of tax it is imposed on a different person but is paid by the ultimate user of goods.
Effects Of Tax Rates On Disposable Income
Increase In Tax Rates: in case of an increase in tax rates, the disposable income which is the income left after paying off all the taxes will decrease. As tax paid = tax rate x income and if this rate is high, then the amount to be paid will also be high and that high amount will be deducted from the total income to calculate the disposable income.
Effect On Production: if the disposable income decreases, the household will spend less and this will decrease the demand in the market, a huge number of individuals and the small company will fall under the line called bad credit loan and consequently the production of goods will also decrease according to its demand in the market.
Effect On GDP: GDP stands for gross domestic product, which means the total amount of goods and services produced in an economy during a period, mostly a year. So as due to high tax rates, disposable income decreases, due to which households start decreasing demand for goods and as a result, the gross domestic product will also decline.
Conclusion
Tax rates play a very substantial part in the economy and the income of every taxpayer. It can increase or decrease the ultimate income of the individual which plays a key role in the demand for products.