Tax cuts lead to a decrease in the government’s real income and an increase in the tax payer’s income in the short run. The long-term effects of tax cuts on the government’s income depend on tax payer’s response according…
The effect of tax cuts on the macro economy will however depend on the way the taxpayers will use their additional income and adjustment of government to its low income.
This is referred to as fiscal policy which contrasts the macroeconomic policy which attempts to control interest rates as well as supply of money in stabilizing the economy. Fiscal policy uses taxation and government expenditure as its two instruments. Changes in taxation levels and government spending impacts on aggregate demand and economic activity level in the economy. It also impacts on pattern of allocation of resources and income distribution. Fiscal policy is used by government to influence economic aggregate demand in the need to achieve price stability, economic growth and full employment.
According to Kogan, (2003), tax cuts stimulate the economy together with intervention of interest rates and deficit spending. Economic stimulation can only be realized if the government reduces its expenditure and the tax payers increase their expenditure especially on local commodities. The free market economy advocates argue that economic welfare of people will be improved since people are rational in what they want than the government.
The suppliers of economy advocate for tax cuts because they stimulate the economy if the government expenditure is maintained and tax payers spend more of their income on locally produced commodities. This stimulates the economic growth but only on condition that it is properly maintained, otherwise it leads to economic inflation. If the expected revenue increase in the long term is not realized, the government may be left with huge debts to pay and hence a dangerous budgetary crisis.
In order that the government determines that the tax cut is or is not worth to the economy, the tax multiplier is used, which measures aggregate production changes as a result of ...
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This is related with the discretionary fiscal policy which amounts for the periods within recession where government could enhance the highway spending so that it could stimulate aggregate demand. Since it is not mandated by law and is not automatic, the discretionary fiscal policy does bring about measures which help in reviving the economy.
Another way tax cuts help revive the economy is through the supply side channel. A tax cut leads to greater disposable income, thus there is greater incentive for people to work . The greater incentive to work results in greater supply i.e. there is an increase in aggregate supply.
Failure to do so can make the economy face the slump for even longer periods of time. For the US economy, the rate of unemployment was feared to increase to more than 9% by the beginning of the year 2010 due to the lack of a stimulus plan. Also during the year 2009 and 2010, the loss on production was estimated to be more than two trillion Dollars which was calculated as the gap between the actual GDP and the potential GDP of the country.
These are the lingering questions that were left behind after Spain ceded our country to the United States after having lost in the Spanish American War. The Treaty of Paris ended the 400 year occupation of our country by Spain. Historically, it would seem like we have never been a free nation having always been occupied by either Spain or the the United States.
As profits increase, businesses-both small and big-can expand for greater profit potential. As businesses expand, employment opportunity increases. As more people are employed, more goods and services are bought, thus further increasing profit.
A similar growth occurred under President Reagan's tax cuts which "stimulated a 17-year economic expansion, interrupted only by an eight-month downturn in 1990-91" (Commonwealth Foundation, 2005, n.p.).
Although there are rumors suggesting that tax cuts could result to a long-term budget deficits, economists during the Bush administration strongly believe that implementing tax cuts is sufficient enough to stimulate investment and public spending
According to Elliot, an economist working with the Conservative Way Forward, this prompted the American government to institute tax cuts so as to reduce the tax burden that citizens and foreign investors had to bear as a way of encouraging investment (Elliott, Sinclair &
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