How would a federal income-tax cut affect our current economy?

Question

Hi guys i have this economics question and i just need a second opinion. "how would a federal income-tax cut affect our current economy? (Be sure to consider both negative and positive aspects of a tax cut.)"

Positive - More money for people
- would encourage business growth
- with more businesses more people employed...??

Negatives - Might cause inflation if demand exceeds supply

Thats all i can think off, i think they are all right, but can anyone tell me if they are correct and add a few more as well. I really need a couple more for the negatives.

Thanks!

Answer 1

The answer depends on many variables, most notably the form a tax cut takes and whether spending is also cut. If taxes are cut but spending is not, then we have the current situation of deficit spending. This can provide economic stimulus, but past evidence shows that the stimulus alone cannot erase the deficits and accumulated debt. The deficit spending in effect becomes a tax on future taxpayers. On the other hand, if spending is cut to compensate, their may be little or no stimulus, since government spending is also part of the total demand in the market. This of course means that if the tax cuts occur without spending cuts it will increase whatever inflationary pressure exists.

Now we come to the issue of the form of tax cuts. Money in the economy is used either for spending or savings/investment. If the goal is to grow the economy, then you must first consider whether the economy is weak due to low demand or low supply. If demand is low, then you would want to encourage spending. If supply is low, then you would want to encourage savings, which become the basis for investment, of directly encourage investment. Lower income taxpayers will spend a greater proportion of their income, so cutting their taxes will help prop up demand. Higher income taxpayers will save a greater proportion of their income, so cutting their taxes will prop up supply.

The above analysis holds true if you cut taxes by cutting the tax rates. If, on the other hand, you cut income taxes by increasing specific deductions or credits, that will determine where the money goes. Alternative energy tax credits, for example, will increase spending primarily in that one industry.

It is important to consider the consequences of cutting taxes. If tax cuts are permanent and/or deficit spending is to be avoided, there will necessarily be cuts in government spending. What will those cuts be? Who will be effected, and how? It is difficult to achieve concensus on this, which is why tax cuts are almost always discussed without any explanation of how they will be payed for (i.e., specified spending cuts and/or future tax increases).

Answer 2

It depends on how the government financed the tax cut. If it was paid for by spending cuts it would probably encourage business growth. If it was financed by domestic borrowing it would compete with businesses for funds, increase interest rates and slow investment. If it was paid for by expanding of the money supply it would increase inflation but cause a temporary boom. If it was financed by foreign investors, it would improve the economy in the short term, but weaken it over the long run.

Answer 3

If only economics were that simple. The federal income tax could hypothetically be abolished. There are many other taxes that could make up for this money. Actually the federal income tax isn't even legal. There are many sources that confirm this and if you want to spend a little time, you could find out just how corrupt the Federal Reserve actually is. Some dismiss it as a conspiracy theory, but watch part three of the Zeitgeist movie or just look at these videos for an introduction of what I am telling you. http://www.youtube.com/watch?v=M19jzF8AwEA&NR=1

Even one of the persons running for president named Ron Paul can be watched on this video (and others) exposing what is happening right under the eyey of the American people and no one seems concerned. http://www.youtube.com/watch?v=QBOIZmuP1P8&feature=related

Answer 4

Your answer appears alright to me, especially if the tax cuts include domestic corporations. You may want to consider adding to the negatives-- 1. Possible reduction in federal budget expenditures, would increase unemployment in selective industries. 2. Possible heavy revenue reduction in corporations and stockholder value that have major exposure in government contracts. Let's face it is not the federal deficit that is our biggest economical threat, but the trade deficit and the value of the American dollar. And it is a falsehood that the national debt to percent of GNP has been less than 30 % over the last 60 years.