... of taxation upon income will clearly change the relationship between personal disposable income and gross domestic product. If, for example, we are to consider the simple Keynesian consumption function: C= a + b YD Where a = autonomous consumption B = marginal propensity to consume YD = disposable income = (1-t) Y - t= taxation level and Y = income. From the consumption function it is possible to see that personal disposable income is directly affected by the rate of taxation. As a consequence, a reduction in income tax will cause a rise in personal disposable income. Therefore, consumption, which depends upon personal disposable income, will rise at every level of national income. Ultimately, consumer spending is boosted. This will increase levels of GDP, because: Y = c + g + I + (x-m) Consumption has been boosted. This will have a knock on effect to levels of Y. The results of such a decrease ...

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