DEFINITION of 'Induced Taxes'

Within the context of macroeconomics and fiscal policy, a type of tax that changes when an economy's real gross domestic product (GDP) changes. The relationship between induced taxes and GDP is positive; as real GDP rises, taxes will also rise, and visa versa.

BREAKING DOWN 'Induced Taxes'

Induced taxes can be used by a government as an automatic economic stabilizer. For example, when the level of real GDP falls substantially, which is indicative of an economic recession, the government can reduce taxes to help spur economic growth.

By reducing taxes in the short-term, an economy's consumption expenditure will increase, causing a rise in the short-term GDP.

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