Automatic stabilizers

Economy and Finance

Automatic stabilizers

27 Aug 2023 Zinkpot 391

Automatic stabilizers are features of the tax systems that temper the economy when it overheats and stimulate the economy when it slumps without any direct intervention by the policymakers.
It is an immediate response to fluctuations in the economic activity of a certain country. The measures get automatically triggered when there is instability in the economic cycle.
When incomes are high, tax liabilities rise and eligibility for government benefits falls without any change in the tax code or other legislation.
Conversely, when incomes slip, tax liabilities drop and more families become eligible for government transfer programs such as food stamps and unemployment insurance that help their slipped income.
These stabilizers are designed primarily to combat negative economic shocks or recessions, although they may also be intended to ‘cool off’ and expand the economy or battle inflation.
These stabilizers are created with the goal to stabilize income levels, consumption patterns or demand, business spending, etc. Such policies are more favored by those belonging to the Keynesian School of Economics, as they believe that demand-side measures are necessary for combating an economic slump or a recession.
These policies take more money out of the economy as taxes during periods of rapid growth and higher income. They may also put more money back into the economy in the form of government spending or tax refunds when economic activity slows down, or revenues fall.