How Can Tax Cuts Help Revive the Economy?

How can Tax Cuts Help Revive the Economy?

How can Tax Cuts Help Revive the Economy?

Jesse Self

Planetcaravan7685@yahoo.com

ECON312

How can Tax Cuts Help Revive the Economy?

During this recession, millions of Americans are trying to come up with ways to bring the economy back to the way it was about five years ago. Can tax cuts be one of the answers to reviving the economy? Many economists and advocates believe that tax cuts may boost the economy by encouraging consumer spending. If people spent more money on products and services, businesses would thrive more, thus creating more jobs for citizens. In turn, income rates would increase, which in turn would increase consumer spending, keeping the circle in motion.

Luckily, the fiscal policy is set in place to regulate taxes and interest rates that the government and businesses can impose on citizens. Without this control, the government may be less likely to offer tax breaks to American citizens, driving the economy into an even deeper recession. The fiscal policy helps to regulate three main elements in the economy associated with it: aggregate demand, resource allocation, and income distribution. All three elements play an important role in the stability of supply and demand, consumer spending, and the overall well-being of the economy. In addition, there are three stances of the fiscal policy that the government can take on: neutral, expansionary, and contractionary. In a neutral stance, the government's spending is completely supported by tax revenues, and has neither a positive or negative effect on the economy. An expansionary stance consists of government spending exceeding tax revenue, and a contractionary stance involves government spending being lower than tax revenue.

One way to determine if tax cuts will actually help boost the economy is to use the tax multiplier. The tax multiplier measures changes in aggregate production based on changes in taxes imposed by the government. When the fiscal policy has a change in stance, the tax multiplier can help determine whether the change will either have a negative or positive effect on the economy. In general, the tax multiplier expresses that an independent change in taxes does not result in an equal change in aggregate expenditures (AmosWEB.com "Tax Multiplier", 2011). The simple tax multiplier is the most common tax multiplier, and is a great tool to determine the ratio of change of aggregate production to an independent change in government imposed taxes when consumption is the only expenditure.

On the other hand, there are skeptics