Tax cuts help to revive the economy by putting more money into the economic system. This conclusion derives from an understanding of the Gross National Product. The GNP is comprised of the following: consumer spending by individuals, investment spending by businesses, government purchases and net exports. Typically, consumer spending accounts for about two-thirds of the GNP (Cloutier, 2009).
Lowering taxes serves to stimulate the economy by giving consumers more disposable income. The fewer taxes consumers pay on their income, the more of that income they can spend. They can save some of their money, but savings rates in the United States are low. Therefore, the vast majority of extra money that the consumers have as a result of tax cuts will be converted into consumer spending.
Consumer spending increases directly increase the GNP. However, they also have a spinoff effect as well. Consumer spending increases give more money to businesses. As businesses have more money, they invest that money into greater capacity, which they do in order to meet the increased level of consumer demand. With the extra money that businesses make, they not only invest it, but they pay some of that in taxes as well. Those taxes go to government, which can spend more. Government spending also fuels increases in business income. As governments collect more taxes from business, they can reduce consumer taxes further.
The net effect of all of this is that lowering taxes on consumers can have an exponential effect on increasing the Gross National Product. Tax reductions not only have a direct effect, but they have indirect effects that filter throughout the nation's economy. In this way, cutting taxes boosts the economy.
Works Cited:
Cloutier, R. (2009). Do tax cuts stimulate the economy? Investopedia. Retrieved November 29, 2009 from http://www.investopedia.com/articles/07/tax_cuts.asp?viewed=1
Works Cited:
Beaton also adds that low and moderate income people tend to spend money on goods and services that are more likely to result directly in jobs and incomes in the community (the spending continues multiplying on a secondary or tertiary basis). Higher income people spend in a way that contributes to "leakage" to their local economy by taking trips to buying non-local goods and services. The implication of Beaton's article
D.). Presently the government manipulates the books around in order to compensate for any tax cuts that they give. In reality, the vital thing for the government to do is to discontinue spending money. While this is not always reasonable, it is essential to make sure that the people and corporations of the nation can flourish. Tax cuts, when put into practice for long-term consequences, will offer a momentous increase in
Tax Cuts How Tax Cuts Stimulate the Economy There are two basic economic theories competing in America today: Keynesian and Classical. Keynesian economic theory calls for the government to influence the economy through government expenditures and collecting of taxes. Classical economic theory asserts that market forces keep the economy in balance and the government should not interfere. However in a strange way, both theories claim tax cuts can stimulate economic growth, the
4. Potential Solutions Economists and authors offer several alternative solutions to the current solutions suggested by the government and political debate. The current solution proposed by government is spending cuts. As mentioned, this may not be the optimal solution to the country's economic woes, since it is likely that this is likely to simply drive the country into further crisis. Instead, a solution should involve creating greater spending power among the
Dividend Tax Capital gains and dividend taxes were both initiated in the early 1970's, by the Democratic Party. Before dividend taxes were enforced, the government made its money through higher aftertax yields, The dividend tax was originally supposed to be a progressive measure, so that the wealthiest paid correspondingly more than the poorest because they had benefited more. At this time, only the wealthy invested in stocks. This is no longer
(Rahn, 2004) "German, French, Canadian, or even Swedish company will pay a lower corporate tax rate on profits earned in its home country, and little or no tax to its home government on any foreign income." (Rahn, 2004) In comparison, an Irish company pays twelve percent tax for income in Ireland and nothing on income from abroad. On the other hand a U.S. company doing business in U.S. And Ireland
Our semester plans gives you unlimited, unrestricted access to our entire library of resources —writing tools, guides, example essays, tutorials, class notes, and more.
Get Started Now