The Major Arguments for and against Cutting Taxes to Promote Economic Development - Essay Example

Assignment The Major Arguments for and against Cutting Taxes to Promote Economic Development Introduction In his elaborate work Rethinking Growth Strategies published by Economic Policy Institute, Robert Lynch has taken a definite stand on the issue of cutting taxes in the context of the U.S. economy, which have got world wide implications as well. Theoretically cutting taxes is regarded as a way to attain greater economic development. However, Lynch appears to be in disagreement with this view.

Contextually, he states, “But do tax cuts and incentives create jobs in a cost-effective manner? Conversely, do state and local public services undermine growth? A review of the available data strongly suggests that the answer to both of these questions is no. And while state and local tax cuts may in theory stimulate economic activity, in practice they are unlikely to do so.” (2) In this paper, therefore, we are going to the major arguments for and against tax cuts and incentives as far as the promotion of economic development are concerned.

Analysis According to theory, tax cuts stimulate the economy of a country. Hence, in theory, arguments in favor of tax exemptions are available. Particularly in the framework of neo-liberal economic policies, strong theoretical arguments defend tax cuts in an organized way. However, Lynch has chosen to set up counter-arguments in this context by evaluating each favoring theoretical argument critically and analytically. Lynch states, “The pressure to cut state and local spending is likely to persist as long as these jurisdictions continue to face budget deficits, demands for additional tax cuts, and calls for a smaller role for government.” (1) Hence, tax cuts directly confront government’s expenditure for the social sector.

In theory, following arguments are furnished in favour of cutting taxes: 1. Tax Burden Argument: Higher rates of business taxes increase the cost of doing business. Hence, exempting business houses from taxes “encourage existing firms to invest, expand, or remain in a state; stimulate new firm start-up; and convince out-of-state firms to relocate to the incentive-offering state”. (Lynch, 4) Eventually, this process creates jobs. 2. Supply-Side Argument: Tax cuts for businesses and individuals provide benefits for work; thereby increasing investment, savings, and economic activity. 3. Demand-Side Argument: Tax cuts help individuals and businesses to accumulate more money.

Hence, they can consume more even at the limited money supply and markets flourish. This helps the market economy as a whole. 4. Business-Climate Argument: “Proponents of the business-climate argument claim that lower taxes and more incentives improve the business climate, while higher taxes and fewer incentives damage it.” (Lynch, 11) Investment decisions are based on the receptive dimensions of a business destination. 5. Competitiveness Argument: If a holistic approach is adopted to grant tax cuts, more investors, consumers, businesses, etc.

will be attracted to a business destination. Hence, a competitive advantage is obtained in the market economy. General tax incentives, area-specific tax incentives, firm-specific tax cuts, etc. are advocated by competitiveness argument. Following arguments are presented against cutting taxes. 1. With respect to the business, “taxes are not just burdens” (Lynch, 4). Business taxes eventually minimize the cost of doing business by infrastructure development, social integration, consumer support, etc. 2. Tax cuts might lead to small deposits in individual savings accounts, but that does not lower the interest rates.

Moreover, too much stress on consumer oriented market may slow job creation. Hence, both Supply-Side and Demand-Side Arguments present only half of the truth. 3. Business climate cannot be improved exclusively by tax cuts. In fact, serious investors are not “persuaded by ‘perceptions’ rather than facts of business costs and benefits” (Lynch, 11). 4. Tax cuts and incentives, which the local and state governments offer, may adversely affect their capability of retaining businesses and creating jobs. 5. The roughly universal validation for tax cuts and related business tax inducements is that these are the very best ways to generate jobs and encourage growth.

This declaration is made even though local and state governments are required to curtail public services as an unpleasant end result of the tax reductions. Conclusion “Left unchallenged, the tax-burden, supply-side, demand-side, business climate and competitiveness arguments are convincing. But, when evaluated critically, they are unimpressive and unpersuasive.” (Lynch, 18) However, in such a scenario, a balanced approach can be assumed as much better an alternative. If tax cuts and tax incentives (which roughly constitute the whole tax expenditure) are granted in a controlled manner, the economy may be benefited from a much wider perspective.

Moreover, the government’s role in process must not be considered as something that is completely redundant or undesirable. Work Cited Lynch, Robert G. Rethinking Growth Strategies. Washington D.C.: Economic Policy Institute, 2004. Print.