What effect does higher taxation have on aggregate demand?

Higher taxation typically decreases aggregate demand because it reduces consumers' disposable income. When individuals and businesses face higher taxes, they have less money available to spend on goods and services. This reduction in consumption directly impacts aggregate demand, as lower consumer spending leads to decreased overall demand within the economy.

Additionally, businesses may also face higher tax burdens, which can lead to decreased investment spending. With less available capital for reinvestment and expansion, overall demand in the economy can be further diminished. Thus, the combination of decreased consumer spending and reduced business investment contributes to a decline in aggregate demand, confirming that higher taxation generally has a negative impact on the overall demand in the economy.