Question

In an essay, discuss whether corporate tax cuts and new tax free zones are sufficient to increase private investment. 

Answer 1

Corporate tax cuts help firms to reduce their cost of production and increase profitability. It makes them more competitive and able to cater the demand. Hence, it encourages firms to build capabilities and make investments. While another policy such as creation of tax free zone, gives tax holidays to the firms and they can become competitive in international market. So, these two policies are supply side macroeconomic policies that certainly boost the firms and help them plan for the private investments. It is due to the reason that funds saved via tax cuts and tax holidays are used for the investment purposes. But, these policies can increase private investments in a limited extent.

The policies should also be focused to increase the aggregate demand in the economy, because it is the increased level of demand that is most important for the firms to make investments. Hence, policies should work to increase in consumption and investment spending both and create jobs at the same time in the economy. Here, central bank (Fed in the USA) should work in collaboration with the government to make policies that stimulate the demand. Policies such as lower rates, increase in money supply and government spending work to increase the demand. It brings opportunity for the firms and they make private investments for short term as well as in the long term as well.

So, only supply side policies will remain unbalanced unless policies to stimulate the demand is also applied in the economy.