What was the purpose of tax cut? Was the tax policy designed to be a counter cyclical fiscal policy?

Question

I looked at the Tax Relief Act of 2001 at www.whitehouse.gov/infocus/tax-relief/ to answer this question as instructed to do, but I am still having a hard time answering this question.

Answer 1

Yes, you are on track.

This is the way fiscal policy works. The federal government has, basically, three ways to control the health of the economy; with 1) interest rates, 2) taxes. and 3) government spending.

It is really quite simple. In times of too much inflation, the objective is to withdraw "money" from circulation in the American economy. In times of recession, the objective is to increase the circulation of "money" in the American economy.
Government spending is a short-term regulator, and it is also short-lived. Movement in interest rates is a bit longer term and more delayed in effect, and changes in tax policy is even longer term and much more delayed in effect, but more seasoned.

How does that work? Let's look at the real life scenario (in a simplified look back down "memory lane.")

In the 1990s, Baby Boomers were in a spending frenzy, pumping a ton of money in the American economy. Government spending was increasing, also (the short-term booster). There was so much money circulating in the economy, Baby Boomers were, also, investing money like crazy! Meanwhile, politicians, in Washington DC, then led by President Bill Clinton, were discussing tax increases (a potential long-term economy killer).

If you remember back in 1999, as the year-end approached, many people around the world were worrying (some panicking) about the calamities of "Y2K," some even fearing that the world was coming to an end, and many were threatening to run to the bank and withdraw all of their money (so they could take it with them, when the world ceased to exist, I guess).

The Federal Reserve Board, with Alan Greenspan as Chairman (remember the "irrational exhuberance" comment?), to encourage people not to borrow money and to leave money in the banks, raised interest rates, significantly (a longer term killer of the economy).

Oh my! January 1, 2000 came, and the world did not cease to exist! Who would have known? Go figure!

George W Bush was inaugurated President, and there was Republican control of Congress. The economy was looking rosey, on the surface, but it was, in the 1990s, set up on a long-term collision course to recession, and, maybe, even, depression, with high interest rates and high taxes; hence, the claim that the Republicans inherited the coming recession. March 2000 started the inevitable crash in the economy.

In order to cushion the fall, tax cuts were in order. Tax rebates were granted. Steady and consistent interest rate cuts were, also, brought into the picture. And, uncharacteristic of the Republicans, government spending
remained high and, actually, increased... all to pump money into the economy and to fortify it. (Even those Americans who spent their money on an extra six-pack a week were fulfilling the intent of pumping money into the economy!)

As intended, since the inevitable 2000-2002 recession, the American economy has improved, considerably. Lower taxes, lower interest rates, and higher government spending did that!

So, here we are in 2007. What lies ahead for the American (and Global) economy? Look at interest rates, tax rates, government spending, recent abuses in the mortgage market, political and economic developments abroad, etc.

Hold on for the ride of your lives!!!

Phil
http://www.phillipfostercpa.com

Answer 2

It was pure politics, no more and no less. The "cut" is one of the biggest lies of the Bush administration. A few of the ultra-rich got a nice cut. I got an extra six-pack a week out of the deal. Whoopie doo!

But many middle-class taxpayers actually got slammed with the largest tax hikes in history since the administration has steadfastly refused to do anything meaningful to index the AMT.

The goal of the AMT back in 1969 when it was passed was to ensure that the wealthy paid at least some tax. Many tax treatments that were considered "abusive" at the time would trigger an AMT event and a hefty tax bill. Fair enough, the system was broken and that patched things. Unfortunately since it was never indexed for inflation, many middle class taxpayers are now being hit with AMT for such "abuses" as having a large family, exercising a stock option, or owning a rental home. So much for their "family values" platform, huh?

Answer 3

tax relief is for people that have a hard paying there taxes.and are looking for a way to pay them back.some times it is a settlement.