Introduction / Context:
The policy objective is to augment tax revenue by withdrawing reliefs on certain small-savings schemes. We must identify the minimal assumption needed for the policy to make fiscal sense.
Given Data / Assumptions:
- Policy: Withdraw tax relief in phases.
- Objective: Increase tax collection.
- Assumption I: Savers will still keep money in those schemes and also pay taxes.
- Assumption II: The overall tax haul will increase significantly as a result.
Concept / Approach:
For the decision to be rational, the government must expect higher tax revenue. It does not need the strong behavior in I (that savers continue exactly as before and yet pay more). They might shift funds but still yield more taxable income elsewhere; what matters is the net increase in collection.
Step-by-Step Solution:
II is necessary: without a reasonable expectation of higher tax receipts, removing relief would not meet the stated aim.I is not necessary: even if some savers reallocate, the policy could still increase overall tax revenue.
Verification / Alternative check:
Negate II: if total collection will not rise, the policy contradicts its goal. Negate I: the policy can still work through broadened tax base or higher taxable alternatives.
Why Other Options Are Wrong:
I-only/Both: Overstate investor behavior; the government’s calculus is aggregate revenue, not saver immobility.Neither ignores the fiscal objective embedded in the policy.
Common Pitfalls:
Assuming government relies on no substitution effects; in reality, net revenue is the driver.
Final Answer:
Only assumption II is implicit
Discussion & Comments