Mahmuda Alam
Econ-110-02
Case Study 2 Tax cuts. A reduction in taxes. It has always been in high demand. However, despite the allure it holds, it is difficult to ascertain whether they are beneficial to the economy. Tax cuts are perceived to increase real incomes for tax payers. Nevertheless, the long-term effects are by no means predictable because the effect is dependent upon how the additional income is utilized and how rapidly the government adjusts to the decrease in revenue. While reducing taxes is a benefit in relation to expansionary fiscal policy and increasing incentives to work, there are far more arguments against cutting taxes. For instance, demand can be assuaged using monetary policy instead and the state of United States’ economy is unbalanced enough …show more content…
The Federal Reserve reduces interest rates as needed and often quite rapidly. When this method is being utilized, the addition of expansionary fiscal policy may not be necessary. It could cause the United States’ economy to be overstimulated and lead to inflation. Furthermore, the United States’ economy is heavily reliant upon consumer spending to encourage growth. This however has led to inflated account deficits, excessive risk taking, and consumer borrowing. Cutting taxes would only exacerbate the issue. In addition, with the sizable percentage of the national debt being a considerable portion of the GDP, the deficit could be further aggravated as borrowing increases. Therefore, reducing taxes may not be the best option in this situation. Finally, consumers are prone to hysteria. It is not certain that a tax cut would abate the concerns and instill confidence among consumers. The sudden policy moves, may induce panic and cause consumers to have little faith in the possibility of growth and that may lead them to save the tax reduction, therefore negating the effect of the
Econ-110-02
Case Study 2 Tax cuts. A reduction in taxes. It has always been in high demand. However, despite the allure it holds, it is difficult to ascertain whether they are beneficial to the economy. Tax cuts are perceived to increase real incomes for tax payers. Nevertheless, the long-term effects are by no means predictable because the effect is dependent upon how the additional income is utilized and how rapidly the government adjusts to the decrease in revenue. While reducing taxes is a benefit in relation to expansionary fiscal policy and increasing incentives to work, there are far more arguments against cutting taxes. For instance, demand can be assuaged using monetary policy instead and the state of United States’ economy is unbalanced enough …show more content…
The Federal Reserve reduces interest rates as needed and often quite rapidly. When this method is being utilized, the addition of expansionary fiscal policy may not be necessary. It could cause the United States’ economy to be overstimulated and lead to inflation. Furthermore, the United States’ economy is heavily reliant upon consumer spending to encourage growth. This however has led to inflated account deficits, excessive risk taking, and consumer borrowing. Cutting taxes would only exacerbate the issue. In addition, with the sizable percentage of the national debt being a considerable portion of the GDP, the deficit could be further aggravated as borrowing increases. Therefore, reducing taxes may not be the best option in this situation. Finally, consumers are prone to hysteria. It is not certain that a tax cut would abate the concerns and instill confidence among consumers. The sudden policy moves, may induce panic and cause consumers to have little faith in the possibility of growth and that may lead them to save the tax reduction, therefore negating the effect of the