If unemployment is high, what is likely to happen to the amount of money the government collects in taxes?

• A. Tax revenue increases because more people receive government benefits.
• B. Tax revenue remains unchanged regardless of unemployment levels.
• C. Tax revenue increases because the government raises tax rates.
• D. Tax revenue decreases because fewer people are earning income.

Answer: (D)

Verified step by step guidance

1. Understand the relationship between employment and tax revenue: Tax revenue primarily comes from taxes on income, such as income tax and payroll taxes, which depend on people earning wages or salaries.
2. Recognize that when unemployment is high, fewer people have jobs and therefore fewer people are earning taxable income.
3. Since fewer people are earning income, the total taxable income base shrinks, leading to a decrease in the total amount of income tax collected by the government.
4. Consider that government benefits paid to unemployed individuals are typically funded by tax revenue but do not directly increase tax revenue; instead, they represent government expenditures.
5. Conclude that high unemployment generally leads to lower tax revenue because the tax base (number of employed earners) is smaller, reducing the total taxes collected.