Final answer:
An income tax increase can help achieve economic policy goals by enabling the government to collect more revenue to finance operations and may reduce the need for borrowing. It's part of a broader fiscal policy to stabilize the economy without hindering growth or creating disincentives for investment and consumption.
Step-by-step explanation:
An increase in income tax can help achieve an economic policy goal by balancing the budget. This means that the government can collect more money to finance its operations and potentially reduce its reliance on borrowing. It is a strategy that aligns with fiscal policy to stabilize the economy. During periods of rapid economic growth, higher taxes can mitigate overheating by reducing consumption.
On the flip side, Arthur Laffer's theory suggests that lower tax rates can lead to increased revenue by incentivizing work and investment, which can broaden the tax base and lead to higher overall tax revenue.
However, there's a delicate balance to strike, as tax policy decisions can profoundly impact economic growth, consumer behavior, and investment. The government aims to maximize revenue without deterring desirable economic activities. Over-taxing can discourage spending and investment, potentially slowing down the economy. The goal is to craft a tax policy that meets revenue obligations without hindering other public policy goals like economic growth and efficiency.