Step 1 : Define ‘tax’ and ‘recession’ in the introduction.

Taxation is the method by which governments finance their spending by levying charges on their citizens and business entities in order to generate revenue. A recession is a macroeconomic term that refers to a significant decline in general economic activity in a country that goes on for more than a few months. Several points must be considered before deciding to increase taxes during a recession.


Step 2 : Discuss how an increase in tax can help an economy during a recession.

An increase in tax may help an economy in recession in several ways.

The higher tax revenue could be used to implement policies to stop the recession. The government may be able to raise more tax revenue to spend on supply-side policy measures such as education and training. This would increase unemployment and boost the economy

A higher import tariff may encourage some consumers to switch from foreign products to buying domestic products. This would create employment in the country and boost economic growth.

The government may want to redistribute income. Progressive taxes could be increased and this tax revenue could be used to help the poor who may be particularly harmed by a recession.


Step 3 : Discuss how an increase in tax can be a disadvantage to an economy during a recession.


Taxes should not be increased in a recession for the several reasons.

Higher tax rates may reduce disposable income. This will result in a fall in consumer expenditure and reduce investment. Lower consumer expenditure and investment would lower total demand this may reduce output further. This is shown in the diagram below.