An increase in income tax rates will shift the savings schedule downwards? Is it true?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

If there is an increase in income tax rates, people will save less money at every given level of income.  This is because they will have to give up more of that money in taxes and will not be able to save it.

However, if you are using "saving schedule" in the same way I would, this will not cause a change in that schedule.  If the x-axis of your graph is disposable income, then the schedule should not change.

All that an increase in income tax will do is to lower the amount of disposable income.  It will not affect the marginal propensity to save.  So all that will happen is a move along the line, not a shift of the line.

krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted on

Saving schedule is a table or curve that shows the level of savings in an economy at different levels of GDP. In general, the supply schedule is an upward sloping line indicating that the savings increase with the GDP.

The exact levels of saving in the economy is very closely related to the disposable income of the people, rising with increase in disposable income. A rise in income tax rates reduces the total disposable income available with people. This would in turn result in reducing the saving. This change in saving behavior of the economy is reflected by saving schedule line shifting to the right.

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