The recent tax relief of no income tax up to ₹12 lakh has brought great joy to the middle class, but many are wondering how the government will generate revenue if taxes are reduced. Let's break this down: In the previous financial year, income tax was the second-largest source of government revenue with 22 % of total revenue, and some are concerned that this new tax regime might lead to a loss in revenue. However, this isn't entirely the case. Here's why: When people have more disposable income, they have two main options for what to do with it: either spend it on goods and services or invest it in places like mutual funds, banks, or other investments. Spending money : If people decide to spend their extra income, they will be paying indirect taxes like GST. This money will flow to sellers, who will also use it to make purchases, generating further GST payments. This creates a cycle of spending and taxation, known as the multiplier effect , where money keeps circulatin...