What does an increase in taxes typically do to disposable income?

An increase in taxes typically decreases disposable income because it takes a larger portion of an individual or household's income away from what they would have available to spend or save after taxes are deducted. Disposable income is defined as the amount of money that households have to spend or save after income taxes are accounted for. When taxes rise, individuals must allocate a larger amount of their earnings to pay taxes, thereby reducing the total amount left for discretionary spending or savings.

This concept is fundamental in macroeconomics, as disposable income directly impacts consumer spending, overall economic activity, and personal savings rates. Higher taxes can lead to lower consumption, which may slow down economic growth, since consumer spending is a significant component of aggregate demand.